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CONTENTS
1. INVESTMENT BASICS....................................................................................................... 6
What is Investment?...................................................................................................................6 Why should one invest? .............................................................................................................6 When to start Investing?...........................................................................................................6 What care should one take while investing?......................................................................7 What is meant by Interest?......................................................................................................7 What factors determine interest rates?...............................................................................7 What are various options available for investment?......................................................8 What are various Short-term financial options available for investment?.............8 What are various Long-term financial o ptions available for investment?..............9 What is meant by a Stock Exchange?................................................................................10 What is an ‘Equity’/Share?......................................................................................................10 What is a ‘Debt Instrument’?.................................................................................................11 What is a Derivative?................................................................................................................11 What is a Mutual Fund?............................................................................................................11 What is an Index?.......................................................................................................................12 What is a Depository? ...............................................................................................................12 What is Dematerialization?.....................................................................................................12

2.

SECURITIES ...........................................................................................................................13
What is meant by ‘Securities’?..............................................................................................13 What is the function of Securities Market?.......................................................................13 Which are the securities one can invest in?.....................................................................13

2.1

Why does Securities Market need Regulators?...............................................................14 Who regulates the Securities Market?................................................................................14 What is SEBI and what is its role?.......................................................................................14 Who are the participants in the Securities Market?......................................................15 Is it necessary to transact through an intermediary?..................................................15 What are the segments of Securities Market?................................................................15

PRIMARY MARKET............................................................................................................16
What is the role of the ‘Primary Market’? .........................................................................16 What is meant by Face Value of a share/debenture? ..................................................16 What do you mean by the term Premium and Discount in a Security Market?.16

3.1

Why do companies need to issue shares to the public? .............................................17 What are the different kinds of issues? .............................................................................17 What is meant by Issue price?..............................................................................................18 What is meant by Market Capitalisation?..........................................................................18 What is the difference between public issue and private placement?...................19 What is an Initial Public Offer (IPO)?..................................................................................19

Who decides the price of an issue? .....................................................................................19 What does ‘price discovery through Book Building Process’ mean?......................19 What is the main difference between offer of shares through book building and offer of shares through normal public issue?..................................................................20 What is Cut-Off Price?...............................................................................................................20 What is the floor price in case of book building? ...........................................................20 What is a Price Band in a book built IPO?........................................................................20 Who decides the Price Band?.................................................................................................21 What is minimum number of days for which a bid should remain open during book building?..............................................................................................................................21 Can open outcry system be used for book building?...................................................21 Can the individual investor use the book building facility to make an application?...................................................................................................................................21 How does one know if shares are allotted in an IPO/offer for sale ? What is the timeframe for getting refund if shares not allotted?....................................................21 How long does it take to get the shares listed after issue?.......................................21 What is the role of a ‘Registrar’ to an issue?...................................................................22 Does NSE provide any facility for IPO?..............................................................................22 What is a Prospectus?...............................................................................................................22 What does ‘Draft Offer document’ mean?........................................................................23 What is an ‘Abridged Prospectus’?.......................................................................................23 Who prepares the ‘Prospectus’/‘Offer Documents’?......................................................23 What does one mean by ‘Lock-in’?......................................................................................24 What is meant by ‘Listing of Securities’? ..........................................................................24 What is a ‘Listing Agreement’?..............................................................................................24 What does ‘Delisting of securities’ mean? ........................................................................24 What is SEBI’s Role in an Issue?..........................................................................................24 Does it mean that SEBI recommends an issue? ............................................................25 Does SEBI tag make one’s money safe?...........................................................................25

3.2

Can companies in India raise foreign currency resources?.......................................25 What is an American Depository Receipt?........................................................................25 What is an ADS? .........................................................................................................................26 What is meant by Global Depository Receipts?..............................................................26

SECONDARY MARKET.....................................................................................................27 INTRODUCTION ...........................................................................................................................27
What is meant by Secondary market?...............................................................................27 What is the role of the Secondary Market?......................................................................27 What is the difference between the Primary Market and the Secondary Market? ...........................................................................................................................................................27

What is the role of a Stock Exchange in buying and selling shares?.....................28 What is Demutualisation of stock exchanges?................................................................28 How is a demutualised exchange different from a mutual exchange?..................28 Currently are there any demutualised stock exchanges in India?..........................28

What is Screen Based Trading?............................................................................................29 What is NEAT?..............................................................................................................................29 How to place orders with the broker? ................................................................................29

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............................................45 Does one need to keep any minimum balance of securities in his account with his DP? ...............42 What is ‘Commodity Exchange’? ..........................45
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.................................................34 Why should one invest in equities in particular?........39 What are the advantages of having a diversified portfolio?......................................................................................................................................40 What is meant by ‘Interest’ payable by a debenture or a bond?........................................37 What is meant by the terms Growth Stock / Value Stock? ................................................................................................................................How does an investor get access to internet based trading facility?..................................................................................................................................41 What are the Segments in the Debt Market in India? ............................
DERIVATIVES ......................................................1
4.........................39 What is Diversification?....................................43 What is Commodity derivatives market? ................................................................................................................................................
DEPOSITORY ........................................................................31 What Do’s and Don’ts should an investor bear in mind when investing in the stock markets?................................................................................................................41
PRODUCTS IN THE S ECONDARY MARKETS ..........34 Equity Investment.............................................................................................................................................................31 What precautions must one take before investing in the stock markets?...................39 What is a ‘Debt Instrument’?.......................................44 What are the benefits of participation in a depository? .........................................................................................................................................................................................................................2
What are the products dealt in the Secondary Markets?....................................................................................42
What are Types of Derivatives?..............................................................................................................................................................2.....................................................30 Why should one trade on a recognized stock exchange only for buying/selling shares?.................................43 What is the difference between Commodity and Financial derivatives?........................................29 What is a Contract Note?............................................................................................38 What is Bid and Ask price?.............30 What is the maximum brokerage that a broker can charge?.......................44
How is a depository similar to a bank?..............................................37 How can one acquire equity shares?........38 What is a Portfolio?..............................41 Who are the Participants in the Debt Market?..............................................................................................................................................................31 How to know if the broker or sub broker is registered?..........................................42 What is an ‘Option Premium’? .......41 How can one acquire securities in the debt market?................................................................45 What is an ISIN?......................................................................................................................................................................... Debt Investment........................32
4............................................................................................................................41 Are bonds rated for their credit quality? ............................45 What is a Custodian?.........................................................................................................30 What details are required to be mentioned on the contract note issued by the stock broker?...........................................................................43 What is meant by ‘Commodity’?.......36 What has been the average return on Equities in India? .....................................................40 What are the features of debt instruments?.............................43
6............................................................36 Which are the factors that influence the price of a stock?................44 Who is a Depository Participant (DP)?.....................................................................40
5..2...........................................................2..............................................................................................................44 Which are the depositories in India?.....................................................................................36
4......

...............67 How is time value of money computed?.47 What is NAV?...........61 What is Pay-in and Pay-out?.......46 Can electronic holdings be converted into Physical certificates?..........................................................................58 What is a Stock Split?............62 What is an Ex-dividend date?..................................................................................
CONCEPTS & MODES OF ANALYSIS ......................................................................................................................60 CLEARING & S ETTLEMENT AND R EDRESSAL........................49 What are the different investment plans that Mutual Funds offer?...........................................................................60 What is the Nifty index?..................................57 What is meant by Dividend yield?....................................................................................................2 8....65 What is meant by the Time Value of Money? ...................................................................................................................................................................................................................................................................................................................................48 Are there any risks involved in investing in Mutual Funds?........................................................................64
What is Simple Interest? ......................................................................................... government securities in his demat account?..3
INDEX ..............................................................................................................................................57
What are Corporate Actions?...........61 What is Rolling Settlement? .........................................60
CORPORATE ACTIONS ......................63 What is an Investor Protection Fund?..........52 What is a Fund Offer document?.............46
7....................62 What is an Ex-date?.......................................................................................................................58 Why do companies announce Stock Split?.............46 Can one dematerialise his debt instruments.....................................................................................................................................................................................................................................................................................................................................................................................57 What is meant by ‘Dividend’ declared by companies?...........................................................................46 Do dematerialised shares have distinctive numbers?................................................................................... 8..................59 What is Buyback of Shares?.................64 What is Compound Interest?...............How can one convert physical holding into electronic holding i.........................................................................46 Can odd lot shares be dematerialised?....................................62 What is a No -delivery period?.....................................................................62 What is a Book-closure/Record date?.................................. how can one dematerialise securities?.........................................................................................................47 What are the benefits of investing in Mutual Funds?....................................................................................63 What recourses are available to investor/client for redressing his grievances?63 What is Arbitration?.........48 What are the different types of Mutual funds? .52 What are the rights that are available to a Mutual Fund holder in India?.........70
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........................................................................................................................................61
What is a Clearing Corporation?....53 What is Active Fund Management?...................................................................................................................................................47
What is the Regulatory Body for Mutual Funds?........................57
8....................................................................................................e................................................56
8......
MUTUAL FUNDS......................................................................................................................................................................63
9...................................................54 What is an ETF?........53 What is Passive Fund Management?.................................................. mutual fund units............................................1
MISCELLANEOUS .............................................................................................................................................................................................................61 What is an Auction?......................................................................................................................................................................................................................................48 What is Entry/Exit Load? ....................................................................................................................................

....................................................................................81 What does a Profit and Loss Account statement consists of?.....................................74 What do these sources of funds represent?...................................................................................................................................................................................85
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......................................79 What is meant by application of funds?..................................What is Effective Annual return?.................................73 What is an Annual Report?................................................74 Which features of an Annual Report should one read carefully?...................................................................................................................................................... ‘Net Block’ and Capital-Work in Progress’ mean?...............................................................82 What should one look for in a Profit and Loss account?..............................................................................................................................74 What is a Balance Sheet and a Profit and Loss Account Statement? What is the difference between Balance Sheet and Profit and Loss Account Statements of a company?..................................
RATIO ANALYSIS .................................78 What is the difference between secured and unsecured loans under Loan Funds?.........77 What is the difference between Equity shareholders and Preferential shareholders?...............................................81 How is balance sheet summarized?................................................................................................................................79 What do the sub-headings under the Fixed Assets like ‘Gross block’ ‘Depreciation’..........................................................................................................................................83
10..........................80 What are Current Liabilities and Provisions and Net Current Assets in the balance sheet?......................72 How to go about systematically analyzing a company?.............

Why should one invest?
One needs to invest to: § § § earn return on your idle resources generate a specified sum of money for a specific goal in life make a provision for an uncertain future
One of the important reasons why one needs to invest wisely is to meet the cost of Inflation. For example. they won't buy as much today as they did last year. This is why it is important to consider inflation as a factor in any long-term investment strategy. 100 purchase today would cost Rs. The aim of investments should be to provide a return above the inflation rate to ensure that the investment does not decrease in value. Inflation causes money to lose value because it will not buy the same amount of a good or a service in the future as it does now or did in the past. If the after-tax return on your investment is less than the inflation rate. which is the return after inflation. by accumulating the principal and
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. if the annual inflation rate is 6%. a Rs. By investing early you allow your investments more time to grow. Instead of keeping the savings idle you may like to use savings in order to get return on it in the future. The cost of living is simply what it costs to buy the goods and services you need to live.1. For example. Investment Basics
What is Investment?
The money you earn is partly spent and the rest saved for meeting future expenses. then your assets have actually decreased in value. Inflation is the rate at which the cost of living increases. if there was a 6% inflation rate for the next 20 years. Remember to look at an investment's 'real' rate of return. that is.
When to start Investing?
The sooner one starts investing the better. This is called Invest ment. 321 in 20 years. then the investment will need to earn more than 6% to ensure it increases in value. whereby the concept of compounding (as we shall see later) increases your income.

the interest or dividend earned on it, year after year. The three golden rules for all investors are: § § § Invest early Invest regularly Invest for long term and not short term

What care should one take while investing?
Before making any investment, one must ensure to: 1. 2. 3. 4. 5. 6. 7. 8. 9. obtain written documents explaining the investment read and understand such documents verify the legitimacy of the investment find out the costs and benefits associated with the investment assess the risk-return profile of the investment know the liquidity and safety aspects of the investment ascertain if it is appropriate for your specific goals compare these details with other investment opportunities available examine if it fits in with other investments you are considering or you have already made 10. deal only through an authorised intermediary 11. seek all clarifications about the intermediary and the investment 12. explore the options available to you if something were to go wrong, and then, if satisfied, make the investment. These are called the Twelve Important Steps to Investing.

What is meant by Interest?
When we borrow money, we are expected to pay for using it – this is known as Interest. Interest is an amount charged to the borrower for the privilege of using the lender’s money. Interest is usually calculated as a percentage of the principal balance (the amount of money borrowed). The percentage rate may be fixed for the life of the loan, or it may be variable, depending on the terms of the loan.

What factors determine interest rates?
When we talk of interest rates, there are different types of interest rates rates that banks offer to their depositors, rates that they lend to their borrowers, the rate at which the Government borrows in the

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Bond/Government Securities market, rates offered to investors in small savings schemes like NSC, PPF, rates at which companies issue fixed deposits etc. The factors which govern these interest rates are mostly economy related and are commonly referred to as macroeconomic factors. Some of these factors are: § § § § § Demand for money Level of Government borrowings Supply of money Inflation rate The Reserve Bank of India and the Government policies which determine some of the variables mentioned above

What are various options available for investment?
One may invest in: § § Physical assets like real estate, gold/jewellery, commodities etc. and/or Financial assets such as fixed deposits with banks, small saving instrume nts with post offices, insurance/provident/pension fund etc. or securities market related instruments like shares, bonds, debentures etc.

What are various Short-term financial options available for investment?
Broadly speaking, savings bank account, money market/liquid funds and fixed deposits with banks may be considered as short-term financial investment options: Savings Bank Account is often the first banking product people use, which offers low interest (4%-5% p.a.), making them only marginally better than fixed deposits. Money Market or Liquid Funds are a specialized form of mutual funds that invest in extremely short-term fixed income instruments and thereby provide easy liquidity. Unlike most mutual funds, money market funds are primarily oriented towards protecting your capital and then, aim to maximise returns. Money market funds usually yield

8

better returns than savings accounts, but lower than bank fixed deposits. Fixed Deposits with Banks are also referred to as term deposits and minimum investment period for bank FDs is 30 days. Fixed Deposits with banks are for investors with low risk appetite, and may be considered for 6-12 months investment period as normally interest on less than 6 months bank FDs is likely to be lower than money market fund returns.

What are various Long-term financial options available for investment?
Post Office Savings Schemes, Public Provident Fund, Company Fixed Deposits, Bonds and Debentures, Mutual Funds etc. Post Office Savings: Post Office Monthly Income Scheme is a low risk saving instrument, which can be availed through any post office. It provides an interest rate of 8% per annum, which is paid monthly. Minimum amount, which can be invested, is Rs. 1,000/- and additional investment in multiples of 1,000/-. Maximum amount is Rs. 3,00,000/- (if Single) or Rs. 6,00,000/- (if held Jointly) during a year. It has a maturity period of 6 years. Premature withdrawal is permitted if deposit is more than one year old. A deduction of 5% is levied from the principal amount if withdrawn prematurely. Public Provident Fund: A long term savings instrument with a maturity of 15 years and interest payable at 8% per annum compounded annually. A PPF account can be opened through a nationalized bank at anytime during the year and is open all through the year for depositing money. Tax benefits can be availed for the amount invested and interest accrued is tax-free. A withdrawal is permissible every year from the seventh financial year of the date of opening of the account and the amount of withdrawal will be limited to 50% of the balance at credit at the end of the 4th year immediately preceding the year in which the amount is withdrawn or at the end of the preceding year whichever is lower the amount of loan if any. Company Fixed Deposits: These are short-term (six months) to medium-term (three to five years) borrowings by companies at a fixed rate of interest which is payable monthly, quarterly, semiannually or annually. They can also be cumulative fixed deposits

9

00. Mutual fund units are issued and redeemed by the Fund Management Company based on the fund's net asset value (NAV).00. A bond is generally a promise to repay the principal along with a fixed rate of interest on a specified date. NSE was incorporated as a national stock exchange.000 units of Rs 10 of Rs 10 is called a Share. Thus. Mutual Funds are usually long term investment vehicle though there some categories of mutual funds. regulating or controlling the business of buying. The interest received is after deduction of taxes. minus expenses. each equity capital of Rs each. The rate of interest varies between 6-9% per annum for company FDs. It is a substitute for those who are unable to invest directly in equities or debt because of resource. whether incorporated or not. Bonds: It is a fixed income (debt) instrument issued for a period of more than one year with the purpose of raising capital. The central or state government. the company then is
10
. For example.
What is an ‘Equity’/Share?
Total equity capital denominations.000 is divided into 20. in accordance with a stated set of objectives. which is determined at the end of each trading session. divided by the number of units issued. buying in small amounts and diversification. selling or dealing in securities. debentures etc. Stock exchange could be a regional stock exchange whose area of operation/jurisdiction is specified at the time of its recognition or national exchanges. which are permitted to have nationwide trading since inception.
What is meant by a Stock Exchange?
The Securities Contract (Regulation) Act. corporations and similar institutions sell bonds. 1956 [SCRA] defines ‘Stock Exchange’ as any body of individuals. Benefits include professional money management. called the Maturity Date. NAV is calculated as the value of all the shares held by the fund.where the entire principal alongwith the interest is paid at the end of the loan period. time or knowledge constraints. Mutual Funds: These are funds operated by an investment company which raises money from the public and invests in a group of assets (shares. in a company the total 2 . such as money market mutual funds which are short term instruments. constituted for the purpose of assisting.). Each such unit of a company is divided into equal units of small called a share.00.

Government securities. the term ‘bond’ is used for debt instruments issued by the Central and State governments and public sector organizations and the term debenture’ is used for instruments issued by ‘ private corporate sector.
What is a Mutual Fund?
A Mutual Fund is a body corporate registered with SEBI (Securities Exchange Board of India) that pools money from individuals/corporate investors and invests the same in a variety of different financial instruments or securities such as equity shares. Mutual funds issue units to the investors.000 equity shares of Rs 10 each. The holders of such shares are members of the company and have voting rights. debentures etc.
What is a ‘Debt Instrument’?
Debt instrument represents a contract whereby one party lends money to another on pre-determined terms with regards to rate and periodicity of interest. Mutual Funds invest in
11
. Bonds. Mutual funds can thus be considered as financial intermediaries in the investment business that collect funds from the public and invest on behalf of the investors. In the Indian securities markets. commodity or any other asset. foreign exchange (forex). repayment of principal amount by the borrower to the lender. called underlying. these products have become very popular and by 1990s. they accounted for about twothirds of total transactions in derivative products. The investment objectives specify the class of securities a Mutual Fund can invest in. since their emergence. The investment objectives outlined by a Mutual Fund in its prospectus are binding on the Mutual Fund scheme.
What is a Derivative?
Derivative is a product whose value is derived from the value of one or more basic variables.00. However. Derivative products initially emerged as hedging devices against fluctuations in commodity prices and commodity-linked derivatives remained the sole form of such products for almost three hundred years. The financial derivatives came into spotlight in post-1970 period due to growing instability in the financial markets.said to have 20. The underlying asset can be equity. index. The appreciation of the portfolio or securities in which the mutual fund has invested the money leads to an appreciation in the value of the units held by investors.

which are declared periodically by the mutual fund. commercial paper and government securities.
What is a Depository?
A depository is like a bank wherein the deposits are securities (viz. Investors are also given the option of getting dividends. or to participate only in the capital appreciation of the scheme.
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. It is a basket of securities and the average price movement of the basket of securities indicates the index movement. whether upwards or downwards. units etc.
What is Dematerialization?
Dematerialization is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form and credited to the investor’s account with his Depository Participant (DP). government securities. debentures.various asset classes like equity. others are a mix of equity and bonds. debentures. The schemes offered by mutual funds vary from fund to fund. bonds. bonds. shares.) in electronic form.
What is an Index?
An Index shows how a specified portfolio of share prices are moving in order to give an indication of market trends. Some are pure equity schemes.

Which are the securities one can invest in?
§ § § § Shares Government Securities Derivative products Units of Mutual Funds etc. scrips. stocks or other marketable securities of similar nature in or of any incorporate company or body corporate. debentures etc. Stated formally. interest and rights in securities. are some of the securities investors in the securities market can invest in. bonds. units of collective investment scheme.
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. 1956. Transfer of resources from those having idle resources (investors) to others who have a need for them (corporates) is most efficiently achieved through the securities market. securities markets provide channels for reallocation of savings to investments and entrepreneurship. called ‘Securities’.
What is the function of Securities Market?
Securities Markets is a place where buyers and sellers of securities can enter into transactions to purchase and sell shares. government securities.2.. through a range of financial products. bonds. it performs an important role of enabling corporates. SECURITIES
What is meant by ‘Securities’?
The definition of ‘Securities’ as per the Securities Contracts Regulation Act (SCRA). entrepreneurs to raise resources for their companies and business ventures through public issues. security receipt or any other instruments so declared by the Central Government. derivatives of securities. Further. Savings are linked to investments by a variety of intermediaries. includes instruments such as shares.

self – regulatory organizations.
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. Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI). in addition to all intermedia ries and persons associated with securities market.
Who regulates the Securities Market?
The responsibility for regulating the securities market is shared by Department of Economic Affairs (DEA).
What is SEBI and what is its role?
The Securities and Exchange Board of India (SEBI) is the regulatory authority in India established under Section 3 of SEBI Act. The regulator ensures that the market participants behave in a desired manner so that securities market continues to be a major source of finance for corporate and government and the interest of investors are protected. Department of Company Affairs (DCA). sub–brokers etc. In particular. 1992 provides for establishment of Securities and Exchange Board of India (SEBI) with statutory powers for (a) protecting the interests of investors in securities (b) promoting the development of the securities market and (c) regulating the securities market. Promoting and regulating self-regulatory organizations Prohibiting fraudulent and unfair trade practices Calling for information from. conducting inquiries and audits of the stock exchanges. SEBI Act. Its regulatory jurisdiction extends over corporates in the issuance of capital and transfer of securities. SEBI has been obligated to perform the aforesaid functions by such measures as it thinks fit.1
Regulator
Why does Securities Market need Regulators?
The absence of conditions of perfect competition in the securities market makes the role of the Regulator extremely important. 1992. mutual funds and other persons associated with the securities market. intermediaries.2. undertaking inspection. it has powers for: § § § § § Regulating the business in stock exchanges and any other securities markets Registering and regulating the working of stock brokers.

Is it necessary to transact through an intermediary?
It is advisable to conduct transactions through an intermediary. namely. For example you need to transact through a trading me mber of a stock exchange if you intend to buy or sell any security on stock exchanges.2. investors in securities and the intermediaries.
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. You need to maintain an account with a depository if you intend to hold securities in demat form. industry associations etc. brokers etc. The list of registered intermediaries is available with exchanges. the issuers of securities. Chose a SEBI registered intermediary.2
Participants
Who are the participants in the Securities Market?
The securities market essentially has three categories of participants. You need to deposit money with a banker to an issue if you are subscribing to public issues. You get guidance if you are transacting through an intermediary. While the corporates and government raise resources from the securities market to meet their obligations. it is households that invest their savings in the securities market. The primary market provides the channel for sale of new securities while the secondary market deals in securities previously issued. as he is accountable for its activities. such as merchant bankers.
What are the segments of Securities Market?
The securities market has two interdependent segments: the primary (new issues) market and the secondary market.

Government securities and corporate bonds have a face value of Rs. then it is said to be issued at a Discount. at Rs. This is known as the Face Value or Par Value of the security as discussed earlier. face value is the amount repaid to the investor when the bond matures (usually. 10) and does not have much bearing on the price of the share. for bonds. For a debt security. They may issue the securities at face value. Also known as par value or simply par.) assigned to a security by the issuer. Rs. or at a discount/premium and these securities may take a variety of forms such as equity. debt etc. 100). PRIMARY MARKET
What is the role of the ‘Primary Market’?
The primary market provides the channel for sale of new securities.
What do you mean by the term Premium and Discount in a Security Market?
Securities are generally issued in denominations of 5.
What is meant by Face Value of a share/debenture?
The nominal or stated amount (in Rs. 100 or Rs. Primary market provides opportunity to issuers of securities. 1000 or any other price. The price at which the security trades depends on the fluctuations in the interest rates in the economy. the face value is usually a very small amount (Rs. it is the amount paid to the holder at maturity. For an equity share. When a security is sold above its face value. it is said to be issued at a Premium and if it is sold at less than its face value. 5. For shares. 10 or 100. it is the original cost of the stock shown on the certificate. which may quote higher in the market. Government as well as corporates. They may issue the securities in domestic market and/or international market. to raise resources to meet their requirements of investment and/or discharge some obligation.3.
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.

So companies invite the public to contribute towards the equity and issue shares to individual investors. The rights are normally offered in a particular ratio to the number of securities held prior to the issue. A follow on public offering (Further Issue) is when an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public. private placements or preferential issues are relatively simpler. the promoters’ capital and the borrowings from banks and financial institutions may not be sufficient for setting up or running the business over a long term. The issuer company has to comply with the Companies Act and the requirements contained in
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. the company allots shares to the applicants as per the prescribed rules and regulations laid down by SEBI. 1956 which is neither a rights issue nor a public issue.1
Issue of Shares
Why do companies need to issue shares to the public?
Most companies are usually started privately by their promoter(s). The classification of issues is illustrated below: Initial Public Offering (IPO) is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. While public and rights issues involve a detailed procedure.
What are the different kinds of issues?
Primarily. a public issue is an offer to the public to subscribe to the share capital of a company. This route is best suited for companies who would like to raise capital without diluting stake of its existing shareholders. Rights or Preferential issues (also known as private placements). Once this is done. This is a faster way for a company to raise equity capital. The way to invite share capital from the public is through a ‘Public Issue’. through an offer document. issues can be classified as a Public. Simply stated. A Preferential issue is an issue of shares or of convertible securities by listed companies to a select group of persons under Section 81 of the Companies Act. Rights Issue is when a listed company which proposes to issue fresh securities to its existing shareholders as on a record date. This paves way for listing and trading of the issuer’s securities.3. However.

g. E. Company A has 120 million shares in issue.
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. 100.
What is meant by Market Capitalisation?
The market value of a quoted company. When they begin to be traded. which is calculated by multiplying its current share price (market price) by the number of shares in issue is called as market capitalization. Classification of Issues
Issues
Public
Rights
Preferential
Initial Public Offering
Further Public Offering
Fresh Issue
Offer for Sale
Fresh Issue
Offer for Sale
What is meant by Issue price?
The price at which a company's shares are offered initially in the primary market is called as the Issue price. disclosures in notice etc.the Chapter pertaining to preferential allotment in SEBI guidelines which inter-alia include pricing. the market price may be above or below the issue price. 12000 million. The market capitalisation of company A is Rs. The current market price is Rs.

The company and merchant banker are however required to give full disclosures of the parameters which they had considered while deciding the issue price. bids are collected from investors at various prices. It is a mechanism where. As per Companies Act.
What does ‘price discovery through Book Building Process’ mean?
Book Building is basically a process used in IPOs for efficient price discovery. SEBI does not play any role in price fixation. it is called private placement. an issue becomes public if it results in allotment to 50 persons or more.
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. the guidelines have provided that the issuer in consultation with Merchant Banker shall decide the price. where the company and the Lead Manager (LM) stipulate a floor price or a price band and leave it to market forces to determine the final price (price discovery through book building process). which are above or equal to the floor price. The sale of securities can be either through book building or through normal public issue.
Who decides the price of an issue?
Indian primary market ushered in an era of free pricing in 1992. Following this. It is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. This means an issue can be privately placed where an allotment is made to less than 50 persons. But if the issue is made to a select set of people. There are two types of issues. 1956. it is a public issue. This paves way for listing and trading of the issuer’s securities.
What is an Initial Public Offer (IPO)?
An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. There is no price formula stipulated by SEBI. one where company and Lead Merchant Banker fix a price (called fixed price) and other. The offer price is determined after the bid closing date.What is the difference between public issue and private placement?
When an issue is not made to only a select set of people but is open to the general public and any other investor at large. during the period for which the IPO is open.

price is known in advance to investor. the issuer is required to indicate either the price band or a floor price in the prospectus. In other words.
What is a Price Band in a book built IPO?
The prospectus may contain either the floor price for the securities or a price band within which the investors can bid. The spread between the floor and the cap of the price band shall not be more than 20%. the demand can be known everyday as the book is being built.
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.What is the main difference between offer of shares through book building and offer of shares through normal public issue?
Price at which securities will be allotted is not known in case of offer of shares through Book Building while in case of offer of shares through normal public issue. In case the price band is revised. The price band can have a revision and such a revision in the price band shall be widely disseminated by informing the stock exchanges. by issuing a press release and also indicating the change on the relevant website and the terminals of the trading me mbers participating in the book building process. This issue price is called “Cut-Off Price”. The issuer and lead manager decides this after considering the book and the investors’ appetite for the stock. it means that the cap should not be more than 120% of the floor pric e. Under Book Building. But in case of the public issue the demand is known at the close of the issue. the bidding period shall be extended for a further period of three days. In case of Book Building.
What is the floor price in case of book building?
Floor price is the minimum price at which bids can be made.
What is Cut-Off Price?
In a Book building issue. The actual discovered issue price can be any price in the price band or any price above the floor price. investors bid for shares at the floor price or above and after the closure of the book building process the price is determined for allotment of shares. subject to the total bidding period not exceeding ten days.

Who decides the Price Band?
It may be understood that the regulatory mechanism does not play a role in setting the price for issues. whether shares are allotted to him or not. the Basis of Allotment should be completed with 15 days from the issue close date.
What is minimum number of days for which a bid should remain open during book building?
The Book should remain open for a minimum of 3 days. It is up to the company to decide on the price or the price band. So an investor should know in about 15 days time from the closure of issue. in consultation with Merchant Bankers. only electronically linked transparent facility is allowed to be used in case of book building.
Can the individual investor use the book building facility to make an application?
Yes. As per SEBI.
How long does it take to get the shares listed after issue?
It would take around 3 weeks after the closure of the book built issue.
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. As soon as the basis of allotment is completed.
How does one know if shares are allotted in an IPO/offer for sale? What is the timeframe for getting refund if shares not allotted?
As per SEBI guidelines.
Can open outcry system be used for book building?
No. within 2 working days the details of credit to demat account / allotment advice and despatch of refund order needs to be completed.

Therefore. NSE decided to offer this infrastructure for conducting online IPOs through the Book Building process. efficient & transparent method for collecting bids using the latest electronic trading systems Costs involved in the issue are far less than those in a normal IPO The system reduces the time taken for completion of the issue process
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The IPO market timings are from 10.00 a. the session timings can be further extended on specific request by the Book Running Lead Manager. quite a few may want to exploit the investors. NSE’s electronic trading network spans across the country providing access to investors in remote areas.m. While a large number of these companies are genuine. NSE operates a fully automated screen based bidding system called NEAT IPO that enables trading members to enter bids directly from their offices through a sophisticated telecommunication network. The Lead Manager coordinates with the Registrar to ensure follow up so that that the flow of applications from collecting bank branches. dispatch security certificates and refund orders completed and securities listed. A part of the guidelines issued by SEBI (Securities and Exchange Board of India) is the disclosure of
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. Book Building through the NSE system offers several advantages: § § The NSE system offers a nation wide bidding facility in securities It provide a fair.00 p. it is very important that an investor before applying for any issue identifies future potential of a company.What is the role of a ‘Registrar’ to an issue?
The Registrar finalizes the list of eligible allottees after deleting the invalid applications and ensures that the corporate action for crediting of shares to the demat accounts of the applicants is done and the dispatch of refund orders to those applicable are sent. On the last day of the IPO. to 3.
Does NSE provide any facility for IPO?
Yes.m. processing of the applications and other matters till the basis of allotment is finalized.
What is a Prospectus?
A large number of new companies float public issues.

the project. if any. This helps investors to evaluate short term and long term prospects of the company. its current and past performance. The draft offer documents are filed with SEBI. It accompanies the application form of public issues. finalizing the cost of the project.
What does ‘Draft Offer document’ mean?
‘Offer document’ means Prospectus in case of a public issue or offer for sale and Letter of Offer in case of a rights issue which is filed with the Registrar of Companies (ROC) and Stock Exchanges (SEs). the promoters. atleast 21 days prior to the filing of the Offer Document with ROC/SEs. product and capacity etc.information to the public.
What is an ‘Abridged Prospectus’?
‘Abridged Prospectus’ is a shorter version of the Prospectus and contains all the salient features of a Prospectus. SEBI may specify changes. the return expected on the money etc.
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. profitability estimates and for preparing of ‘Prospectus’. It also contains lot of mandatory information regarding underwriting and statutory compliances. in the draft Offer Document and the issuer or the lead merchant banker shall carry out such changes in the draft offer document before filing the Offer Document with ROC/SEs. cost of the project. the way money is proposed to be spent. ‘Draft Offer document’ means the offer document in draft stage. its equity capital. This disclosure includes information like the reason for raising the money.
Who prepares the ‘Prospectus’/‘Offer Documents’?
Generally. The ‘Prospectus’ is submitted to SEBI for its approval. The Draft Offer Document is available on the SEBI website for public comments for a period of 21 days from the filing of the Draft Offer Document with SEBI. An offer document covers all the relevant information to help an investor to make his/her investment decision. This information is in the form of ‘Prospectus ’ which also includes information regarding the size of the issue. the current status of the company. the public issues of companies are handled by ‘Merchant Bankers’ who are responsible for getting the project appraised. means of financing.

What is a ‘Listing Agreement’?
At the time of listing securities of a company on a stock exchange. The validity period of SEBI’s observation letter is three months only i. The listing agreement specifies the terms and conditions of listing and the disclosures that shall be made by a company on a continuous basis to the exchange. The prime objective of admission to dealings on the exchange is to provide liquidity and marketability to securities.e.
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.
What is SEBI’s Role in an Issue?
Any company making a public issue or a listed company making a rights issue of value of more than Rs 50 lakh is required to file a draft offer document with SEBI for its observations. shall continue to hold some minimum percentage in the company after the public issue.
What is meant by ‘Listing of Securities’?
Listing means admission of securities of an issuer to trading privileges (dealings) on a stock exchange through a formal agreement. The company can proceed further on the issue only after getting observations from SEBI. as also to provide a mechanism for effective control and supervision of trading. who are controlling the company. the securities of that company would no longer be traded at that stock exchange.What does one mean by ‘Lock-in’?
‘Lock-in’ indicates a freeze on the sale of shares for a certain period of time. the company is required to enter into a listing agreement with the exchange. SEBI guidelines have stipulated lock-in requirements on shares of promoters mainly to ensure that the promoters or main persons. As a consequence of delisting.
What does ‘Delisting of securities’ mean?
The term ‘Delisting of securities’ means permanent removal of securities of a listed company from a stock exchange. the company has to open its issue within three months period.

SEBI mainly scrutinizes the issue for seeing that adequate disclosures are made by the issuing company in the prospectus or offer document. the investors are generally advised to study all the material facts pertaining to the issue including the risk factors before considering any investment. They are strongly warned against relying on any ‘tips’ or news through unofficial means.
Does SEBI tag make one’s money safe?
The investors should make an informed decision purely by themselves based on the contents disclosed in the offer documents.
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. The term is often used to refer to the ADSs themselves.
3.e. However.
What is an American Depository Receipt?
An American Depositary Receipt ("ADR") is a physical certificate evidencing ownership of American Depositary Shares ("ADSs").Does it mean that SEBI recommends an issue?
SEBI does not recommend any issue nor does take any responsibility either for the financial soundness of any scheme or the project for which the issue is proposed to be made or for the correctness of the statements made or opinions expressed in the offer document.2
Foreign Capital Issuance
Can companies in India raise foreign currency resources?
Yes. Indian companies are permitted to raise foreign currency resources through two main sources: a) issue of foreign currency convertible bonds more commonly known as ‘Euro’ issues and b) issue of ordinary shares through depository receipts namely ‘Global Depository Receipts (GDRs)/American Depository Receipts (ADRs)’ to foreign investors i. to the institutional investors or individual investors. SEBI does not associate itself with any issue/issuer and should in no way be construed as a guarantee for the funds that the investor proposes to invest through the issue.

GDRs may be used in public or private markets inside or outside US. dollar denominated securities and pay dividends in U.S.
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. subject to the terms specified on the ADR certificate. It represents the foreign shares of the company held on deposit by a custodian bank in the company 's home country and carries the corporate and economic rights of the foreign shares. ADSs are issued by a depository bank. The underlying shares correspond to the GDRs in a fixed ratio say 1 GDR=10 shares. dollars.S. investors with a convenient way to invest in overseas securities and to trade non-U. dollar denominated form of equity ownership in a non-U.S. They are traded in the same manner as shares in U. companies. they do not eliminate the currency risk associated with an investment in a non-U.What is an ADS?
An American Depositary Share ("ADS") is a U.S. securities in the U.S.S. Although ADSs are U. One or several ADSs can be represented by a physical ADR certificate. GDR. company. a negotiable certificate usually represents company’s traded equity/debt. on the New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX) or quoted on NASDAQ and the over-the-counter (OTC) market.S. company. such as JPMorgan Chase Bank.S.
What is meant by Global Depository Receipts?
Global Depository Receipts (GDRs) may be defined as a global finance vehicle that allows an issuer to raise capital simultaneously in two or markets through a global offering.S. ADSs provide U. The terms ADR and ADS are often used interchangeably.

1 Introduction
What is meant by Secondary market?
Secondary market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. enabling implementation of incentive-based management contracts. Secondary equity markets serve as a monitoring and control conduit—by facilitating value-enhancing control activities. securities are offered to public for subscription for the purpose of raising capital or fund.
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.
What is the difference between the Primary Market and the Secondary Market?
In the primary market.
What is the role of the Secondary Market?
For the general investor. Secondary market comprises of equity markets and the debt markets. Secondary market is an equity trading venue in which already existing/pre-issued securities are traded among investors.4. While stock exchange is the part of an auction market. Majority of the trading is done in the secondary market. SECONDARY MARKET
4. the secondary market provides an efficient platform for trading of his securities. For the management of the company. Secondary market could be either auction or dealer market. Over-the-Counter (OTC) is a part of the dealer market. and aggregating information (via price discovery) that guides management decisions.

the broker members of the exchange are both the owners and the traders on the exchange and they further manage the exchange as well. This at times can lead to conflicts of interest in decision making. Here. the management and the trading rights at the exchange are segregated from one another.
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. under the overall supervision of the regulatory authority.
Currently are there any demutualised stock exchanges in India?
Currently. on the other hand.
How is a demutualised exchange different from a mutual exchange?
In a mutual exchange. The trading platform provided by NSE is an electronic one and there is no need for buyers and sellers to meet at a physical location to trade. the Securities and Exchange Board of India (SEBI). the three functions of ownership. management and trading are concentrated into a single Group.
What is Demutualisation of stock exchanges?
Demutualisation refers to the legal structure of an exchange whereby the ownership. They can trade through the computerized trading screens available with the NSE trading members or the internet based trading facility provided by the trading members of NSE.1 Stock Exchange
What is the role of a Stock Exchange in buying and selling shares?
The stock exchanges in India.4. the ownership. the National Stock Exchange (NSE) and Over the Counter Exchange of India (OTCEI) are demutualised.1. two stock exchanges in India. provide a trading platform. management and trading are in separate hands. A demutualised exchange. has all these three functions clearly segregated. where buyers and sellers can meet to transact in securities. i.e.

liquidity and transparency. In order to provide efficiency. Investors need to get in touch with an NSE broker providing this service to avail of internet based trading facility. fullyautomated screen based trading system (SBTS) where a member can punch into the computer the quantities of a security and the price at which he would like to transact. At the server end all trading information is stored in an inmemory database to achieve minimum response time and maximum system availability for users.
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.
What is NEAT?
NSE is the first exchange in the world to use satellite communication technology for trading.
How does an investor get access to internet based trading facility?
There are many brokers of the NSE who provide internet based trading facility to their clients.
How to place orders with the broker?
You may go to the broker’s office or place an order on the phone/internet or as defined in the Model Agreement. It has uptime record of 99. which every client needs to enter into with his or her broker. This imposed limits on trading volumes and efficiency.2 Stock Trading
What is Screen Based Trading?
The trading on stock exchanges in India used to take place through open outcry without use of information technology for immediate matching or recording of trades.4. there is uniform response time of less than one second. This was time consuming and inefficient. on-line. and the transaction is executed as soon as a matching sale or buy order from a counter party is found. called National Exchange for Automated Trading (NEAT). is a state of-the-art client server based application. NSE introduced a nationwide. Internet based trading enables an investor to buy/sell securities through internet which can be accessed from a computer at the investor’s residence or anywhere else where the client can access the internet.1.7%. Its trading system. For all trades entered into NEAT system.

Securities Transaction Tax and any other charges levied by the broker. settlement number and time period for settlement. contain the details of trades.
What details are required to be mentioned on the contract note issued by the stock broker?
A broker has to issue a contract note to clients for all transactions in the form specified by the stock exchange. Name of partner/proprietor/Authorised Signatory. stamped with requisite value and duly signed by the authorized signatory. It imposes a legally enforceable relationship between the client and the trading member with respect to purchase/sale and settlement of trades. The contract note inter-alia should have following: § § § § § § § § § § § § Name. address and SEBI Registration number of the Member broker. Contract notes are kept in duplicate.
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. the client keeps one copy and returns the second copy to the trading member duly acknowledged by him.
What is the maximum brokerage that a broker can charge?
The maximum brokerage that can be charged by a broker from his clients as commission cannot be more than 2. date of issue of contract note. Constituent (Client) name/Code Number. After verifying the details contained therein./Fax no.What is a Contract Note?
Contract Note is a confirmation of trades done on a particular day on behalf of the client by a trading member. No. Contract number. the trading member and the client should keep one copy each.. Brokerage and Purchase/Sale rate. A valid contract note should be in the prescribed form. Appropriate stamps have to be affixed on the contract note or it is mentioned that the consolidated stamp duty is paid. Trade number and Trade time. Quantity and kind of Security bought/sold by the client. Service tax rates. Code number of the member given by the Exchange.5% of the value mentioned in the respective purchase or sale note. It also helps to settle disputes/claims between the investor and the trading member. Order number and order time corresponding to the trades. Dealing Office Address/Tel. It is a prerequisite for filing a complaint or arbitration proceeding against the trading member in case of a dispute. Signature of the Stock broker/Authorized Signatory.

quality of management. A broker's registration number begins with the letters ‘INB’ and that of a sub broker with the letters ‘INS’. lack of any counter-party risk which is assumed by the clearing corporation. Investors should always know the risk that they are taking and invest in a manner that matches their risk tolerance. Find out the business the company is into. Trading at the exchange offers investors the best prices prevailing at the time in the market. access to investor grievance and redressal mechanism of stock exchanges. All investments carry risk of some kind. Do not be misled by market rumours. its future prospects. databases available with vendors or your financial advisor.
What precautions must one take before investing in the stock markets?
Here are some useful pointers to bear in mind before you invest in the markets: § Make sure your broker is registered with SEBI and the exchanges and do not deal with unregistered intermediaries. economic magazines.
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. past track record etc Sources of knowing about a company are through annual reports. luring advertisement or ‘hot tips’ of the day.
How to know if the broker or sub broker is registered?
One can confirm it by verifying the registration certificate issued by SEBI. protection upto a prescribed limit.Why should one trade on a recognized stock exchange only for buying/selling shares?
An investor does not get any protection if he trades outside a stock exchange. from the Investor Protection Fund etc. Ensure that you receive contract notes for all your transactions from your broker within one working day of execution of the trades. Take informed decisions by studying the fundamentals of the company.

§
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If your financial advisor or broker advises you to invest in a company you have never heard of. ma y be risky and may to lead to losing some. Be cautious about stocks which show a sudden spurt in price or trading activity. unless you have done adequate study of the company.htm. log in to the NSE website (www.
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What Do’s and Don’ts should an investor bear in mind when investing in the stock markets?
§ § § § § § § Ensure that the intermediary (broker/sub-broker) has a valid SEBI registration certificate. most. Ensure that the contract note contains details such as the broker’s name. Any advise or tip that claims that there are huge returns expected. To cross check genuineness of the transactions. especially for acting quickly. about a company. securities transaction tax etc. Spend some time checking out about the company before investing. Ensure that you receive the contract note from your broker within 24 hours of the transaction. Enter into an agreement with your broker/sub-broker setting out terms and conditions clearly. transaction price. and is signed by the Authorised Signatory of the broker.com/content/equities/ eq_trdverify. Do not be attracted to stocks based on what an internet website promotes. be cautious.nseindia.nseindia. or all of your money. service tax. Ensure that you read carefully and understand the contents of the ‘Risk Disclosure Document’ and then acknowledge it. Do your own research before investing in any stock. Insist on a contract note issued by your broker only. Do not be attracted by announcements of fantastic results/news reports. Investing in very low priced stocks or what are known as penny stocks does not guarantee high returns.com) and go to the trade verification facility extended by NSE at www. for trades done each day. trade time and number. Ensure that you give all your details in the ‘Know Your Client’ form. brokerage.

Do not leave signed blank delivery instruction slip with anyone. § authorisation is only for limited purpose of debits and credits arising out of valid transactions executed through that intermediary only. Be cautious while taking funding form authorised intermediaries as these transactions are not covered under Settlement Guarantee mechanisms of the exchange. the Demat delivery instruction slip should be from your own Demat account. within one working day of the payout date. Do not accept trades executed under some other client code to your account. do not part your funds to unauthorized persons for Portfolio Management. Ensure that you do not undertake deals on behalf of others or trade on your own name and then issue cheques from a family members’/ friends’ bank accounts. While delivering shares to your broker to meet your obligations. Hence. Insist on periodical statement of accounts of funds and securities from your broker. not from any other family members’/friends’ accounts. make sure that: § your authorization is in favour of registered intermediary only. No intermediary in the market can accept deposit assuring fixed returns.§
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Issue account payee cheques/demand drafts in the name of your broker only.
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. Please ensure that you receive payments/deliveries from your broker. ‘Portfolio Management Services’ could be offered only by intermediaries having specific approval of SEBI for PMS. Delivery Instruction Slip is a very valuable document. When you are authorising someone through ‘Power of Attorney’ for operation of your DP account. as it appears on the contract note/SEBI registration certificate of the broker. for the transactions entered by you. While meeting pay in obligation make sure that correct ID of authorised intermediary is filled in the Delivery Instruction Form. ensure that the delivery instructions are made only to the designated account of your broker only. Insist on execution of all orders under unique client code allotted to you. Similarly. Hence do not give your money as deposit against assurances of returns. Do not sign blank delivery instruction slip(s) while meeting security payin obligation. Cross check and reconcile your accounts promptly and in case of any discrepancies bring it to the attention of your broker immediately.

alongwith the complaint. it is very important that you submit copies of all relevant documents like contract notes.g. proof of payments/delivery of shares etc. § authorization given by you has been properly used for the purpose for which authorization has been given. If your broker/sub-broker does not resolve your complaints within a reasonable period (say within 15 days). Don’t accept unsigned/duplicate contract note. a
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. Don’t delay payment/deliveries of securities to broker. § in case you find wrong entries please report in writing to the authorized intermediary. Rights Issue/ Rights Shares: The issue of new securities to existing shareholders at a ratio to those already held. §
4. please bring it to the attention of the ‘Investor Grievances Cell’ of the NSE. While lodging a complaint with the ‘Investor Grievances Cell’ of the NSE. Remember. represents the form of fractional ownership in a business venture. resolution of complaints becomes difficult. Familiarise yourself with the rules. For e.2 Products in the Secondary Markets
What are the products dealt in the Secondary Markets?
Following are the main financial products/instruments dealt in the Secondary market which may be divided broadly into Shares and Bonds: Shares: Equity Shares: An equity share. commonly referred to as ordinary share. regulations and circulars issued by stock exchanges/SEBI before carrying out any transaction. please bring them to the notice of the broker immediately in writing (acknowledged by the broker) and ensure their prompt rectification. In the event of any discrepancies/disputes. inform the main broker in writing about the dispute at the earliest and in any case not later than 6 months. at a price. In case of sub-broker disputes. Don’t accept contract note signed by any unauthorised person.§ § § §
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you verify DP statement periodically say every month/ fortnight to ensure that no unauthorised transactions have taken place in your account. in the absence of sufficient documents.

if not paid. Cumulative Convertible Preference Shares: A type of preference shares where the dividend payable on the same accumulates. their claims rank below the claims of the company’s creditors. these shares will be converted into equity capital of the company. at the maturity of the bond. The buyer of these bonds receives only one payment. The issuer usually pays the bond holder periodic interest payments over the life of the loan. Treasury Bills: Short-term (up to one year) bearer discount security issued by government as a means of financing their cash requirements. 125. The various types of Bonds are as follows: Zero Coupon Bond: Bond issued at a discount and repaid at a face value. It is normally unsecured. All arrears of preference dividend have to be paid out before paying dividend on equity shares. Bonus Shares: Shares issued by the companies to their shareholders free of cost based on the number of shares the shareholder owns. the issuer promises to repay the loan amount on a specified maturity date. No periodic interest is paid. 125 per share. A debt security is generally issued by a company.2:3 rights issue at Rs. After a specified date. The difference between the issue price and redemption price represents the return to the holder. would entitle a shareholder to receive 2 shares for every 3 shares held at a price of Rs. A bond investor lends money to the issuer and in exchange. Preference shares: Owners of these kind of shares are entitled to a fixed dividend or dividend calculated at a fixed rate to be paid regularly before dividend can be paid in respect of equity share. bondholders/debenture holders. Convertible Bond: A bond giving the investor the option to convert the bond into equity at a fixed conversion price. Bond: is a negotiable certificate evidencing indebtedness. municipality or government agency.
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. Cumulative Preference Shares: A type of preference shares on which dividend accumulates if remained unpaid. But in the event of liquidation. They also enjoy priority over the equity shareholders in payment of surplus.

Research studies have proved that the equities have outperformed most other forms of investments in the long term. Equities are high risk investments. Compared to
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.
However. It also provides your portfolio with the growth necessary to reach your long term investment goals. SBI 301.
Therefore. Mr. Dividend is a percentage of the face value of a share that a company returns to its shareholders from its annual profits.2. Indian stock market has returned about 17% to investors on an average in terms of increase in share prices or capital appreciation annually. Raju invests in Nifty on January 1. this does not mean all equity investments would guarantee similar high returns.86%. Research studies have proved that investments in some shares with a longer tenure of investment have yielded far superio r returns than any other investment.5% dividend annually.07%.17% and Reliance 281.90). Investment in shares of ONGC Ltd for the same period gave a return of 465. Besides that on average stocks have paid 1.
What has been the average return on Equities in India?
Since 1990 till date. 2000 (index value 1592. § § Equities are considered the most challenging and the rewarding. The Nifty value as of end December 2005 was 2836.1 Equity Investment
Why should one invest in equities in particular?
When you buy a share of a company you become a shareholder in that company.55.42%. Shares are also known as Equities. Nifty has given an annualised return of 17%. Equities have the potential to increase in value over time. when compared to other investment options. One needs to study them carefully before investing. Holding this investment over this period Jan 2000 to Dec 2005 he gets a return of 78. This may be illustrated with the help of following examples: a) b) Over a 15 year period between 1990 to 2005.4.

financial health and management. resulting in a boom in the market. However. level of technology and marketing skills.
What is meant by the terms Growth Stock / Value Stock?
Growth Stocks : In the investment world we come across terms such as Growth stocks. a prudent advice to all investors is to analyse and invest and not speculate in shares. communal riots. The stock-specific factor is related to people’s expectations about the company. Value
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. real estate. the effect of market-specific factor is generally short-term. Despite ups and downs. friendly budget. depress the market irrespective of certain companies performing well. unfavourable events like war.buildings. Companies whose potential for growth in sales and earnings are excellent. its future earnings capacity. are growing faster than other companies in the market or other stocks in the same industry are called the Growth Stocks. subsidiaries. These companies usually pay little or no dividends and instead prefer to reinvest their profits in their business for further expansions. if invested over a longer duration. Therefore. price of a stock in the long run gets stabilized based on the stockspecific factors. investing in equity shares offers the highest rate of return. Value stocks etc. Value Stocks: The task here is to look for stocks that have been overlooked by other investors and which may have a ‘hidden value’. The market specific factor is influenced by the investor’s sentiment towards the stock market as a whole. or may be in an industry that's not fancied by most investors. and so on.most other forms of investments. economic crisis. Events favourable to an economy. political or regulatory environment like high economic growth.
Which are the factors that influence the price of a stock?
Broadly there are two factors: (1) stock specific and (2) market specific. Many of these assets still have value. On the other hand. even a company that has seen its stock price decline still has assets to its name . can fuel euphoria in the investors. yet that value may not be reflected in the stock's price. stable government etc. minority government etc. inventories. These companies may have been beaten down in price because of some bad event. However. This factor depends on the environment rather than the performance of any particular company.

If an investor looks at a computer screen for a quote on the stock of say XYZ Ltd. Price (Rs. this is the rate/ price at which there is seller ready to sell his stock.10 50. They like P/E ratio being below a certain absolute limit.25 50. it might look something like this: Bid (Buy side) Ask (Sell side) ______________________________________________________ Qty.investors look to buy stocks that are undervalued. Total sales at a certain level relative to the company's market capitalization.
How can one acquire equity shares?
You may subscribe to issues made by corporates in the primary market. resources are mobilised by the corporates through fresh public issues (IPOs) or through private placements.00 50. To buy and sell securities you should approach a SEBI registered trading member (broker) of a recognized stock exchange.
What is Bid and Ask price?
The ‘Bid’ is the buyer’s price.85 50.35 2000 500 50.65 1450 _____________________________________________________________ Total 5850 8950 _____________________________________________________________
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. Bid is the rate/price at which there is a ready buyer for the stock.40 1000 550 50.e.) _____________________________________________________________ 1000 50. The ‘Ask’ (or offer) is what you need to know when you're buying i. In the primary market. you may purchase shares from the secondary market. which you intend to sell. Price (Rs. It is this price that you need to know when you have to sell a stock. and then hold those stocks until the rest of the market realizes the real value of the company's assets.55 3000 1300 49. or market value etc. Alternately.05 50. The seller will sell his stock if he gets the quoted “Ask’ price. The value investors tend to purchase a company's stock usually based on relationships between the current market price of the company and certain business fundamentals.50 1500 2500 50.) Qty. dividend yields above a certain absolute limit.

Diversification is possibly the best way to reduce the risk in a portfolio. mutual fund units to items such as gold. you may still have the stability of the bonds in your portfolio. debentures. The narrower the difference the more liquid or highly traded is the stock. bonds. Items that are considered a part of your portfolio can include any asset you own-from shares.
What are the advantages of having a diversified portfolio?
A good investment portfolio is a mix of a wide range of asset class." If you spread your investments across various types of assets and markets. It is designed to minimize the impact of any one security on overall portfolio performance. However. so with a mix of asset types.25). There have been all sorts of academic studies and formulas that demonstrate why diversification is important. 50.35). Different securities perform differently at any point in time. fixed deposits. for most investors a portfolio has come to signify an investment in financial instruments like shares.
What is a Portfolio?
A Portfolio is a combination of different investment assets mixed and matched for the purpose of achieving an investor's goal(s). you'll reduce the risk of your entire portfolio getting affected by the adverse returns of any single asset class. art and even real estate etc. The best Sell (Ask) order is the order with the lowest sell price (2000 shares @ Rs. on the left-hand side after the Bid quantity and price. debentures. When your stocks go down. your entire portfolio does not suffer the impact of a decline of any one security. but it's really just the simple practice of "not putting all your eggs in one basket. whereas on the right hand side we find the Ask quantity and prices.
What is Diversification?
It is a risk management technique that mixes a wide variety of investments within a portfolio. The best Buy (Bid) order is the order with the highest price and therefore sits on the first line of the Bid side (1000 shares @ Rs. The difference in the price of the best bid and ask is called as the Bid-Ask spread and often is an indicator of liquidity in a stock.
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. 50.Here. mutual fund units.

4.2.2. Debt Investment
What is a ‘Debt Instrument’?
Debt instrument represents a contract whereby one party lends money to another on pre-determined terms with regards to rate and periodicity of interest, repayment of principal amount by the borrower to the lender. In Indian securities markets, the term ‘bond’ is used for debt instruments issued by the Central and State governments and public sector organizations and the term ‘debenture’ is used for instruments issued by private corporate sector.

What are the features of debt instruments?
Each debt instrument has three features: Maturity, coupon and principal. Maturity: Maturity of a bond refers to the date, on which the bond matures, which is the date on which the borrower has agreed to repay the principal. Term-to-Maturity refers to the number of years remaining for the bond to mature. The Term-to-Maturity changes everyday, from date of issue of the bond until its maturity. The term to maturity of a bond can be calculated on any date, as the distance between such a date and the date of maturity. It is also called the term or the tenure of the bond. Coupon: Coupon refers to the periodic interest payments that are made by the borrower (who is also the issuer of the bond) to the lender (the subscriber of the bond). Coupon rate is the rate at which interest is paid, and is usually represented as a percentage of the par value of a bond. Principal: Principal is the amount that has been borrowed, and is also called the par value or face value of the bond. The coupon is the product of the principal and the coupon rate. The name of the bond itself conveys the key features of a bond. For example, a GS CG2008 11.40% bond refers to a Central Government bond maturing in the year 2008 and paying a coupon of 11.40%. Since Central Government bonds have a face value of Rs.100 and normally pay coupon semi-annually, this bond will pay Rs. 5.70 as six- monthly coupon, until maturity.

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What is meant by ‘Interest’ payable by a debenture or a bond?
Interest is the amount paid by the borrower (the company) to the lender (the debenture-holder) for borrowing the amount for a specific period of time. The interest may be paid annual, semi-annually, quarterly or monthly and is paid usually on the face value (the value printed on the bond certificate) of the bond.

What are the Segments in the Debt Market in India?
There are three main segments in the debt markets in India, viz., (1) Government Securities, (2) Public Sector Units (PSU) bonds, and (3) Corporate securities. The market for Government Securities comprises the Centre, State and State-sponsored securities. In the recent past, local bodies such as municipalities have also begun to tap the debt markets for funds. Some of the PSU bonds are tax free, while most bonds including government securities are not tax-free. Corporate bond markets comprise of commercial paper and bonds. These bonds typically are structured to suit the requirements of investors and the issuing corporate, and include a variety of tailor- made features with respect to interest payments and redemption.

Who are the Participants in the Debt Market?
Given the large size of the trades, Debt market is predominantly a wholesale market, with dominant institutional investor participation. The investors in the debt markets are mainly banks, financial institutions, mutual funds, provident funds, insurance companies and corporates.

Are bonds rated for their credit quality?
Most Bond/Debenture issues are rated by specialised credit rating agencies. Credit rating agencies in India are CRISIL, CARE, ICRA and Fitch. The yield on a bond varies inversely with its credit (safety) rating. The safer the instrument, the lower is the rate of interest offered.

How can one acquire securities in the debt market?
You may subscribe to issues made by t he government/corporates in the primary market. Alternatively, you may purchase the same from the secondary market through the stock exchanges.

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5. DERIVATIVES
What are Types of Derivatives?
Forwards: A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at today’s pre-agreed price. Futures: A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts, such as futures of the Nifty index. Options: An Option is a contract which gives the right, but not an obligation, to buy or sell the underlying at a stated date and at a stated price. While a buyer of an option pays the premium and buys the right to exercise his option, the writer of an option is the one who receives the option premium and therefore obliged to sell/buy the asset if the buyer exercises it on him. Options are of two types - Calls and Puts options: ‘Calls’ give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. ‘Puts’ give the buyer the right, but not the obligation to sell a given quantity of underlying asset at a given price on or before a given future date. Presently, at NSE futures and options are traded on the Nifty, CNX IT, BANK Nifty and 116 single stocks. Warrants: Options generally have lives of up to one year. The majority of options traded on exchanges have maximum maturity of nine months. Longer dated options are called Warrants and are generally traded over-thecounter.

What is an ‘Option Premium’?
At the time of buying an option contract, the buyer has to pay premium. The premium is the price for acquiring the right to buy or sell. It is price paid by the option buyer to the option seller for acquiring the right to buy or sell. Option premiums are always paid upfro nt.

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At present. Due to the bulky nature of the underlying assets. financial assets are not bulky and do not need special facility for storage. allowing effective competition among buyers and among sellers – this would include auction-type exchanges. but effectively takes place through many non-related individual transactions between different permutations of buyers and sellers.
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. physical settlement in commodity derivatives creates the need for warehousing. In a wider sense. cotton. Even in the case of physical settlement. However there are some features which are very peculiar to commodity derivative markets. In the case of financial derivatives. or a company of any other body corporate organizing futures trading in commodities.What is ‘Commodity Exchange’?
A Commodity Exchange is an association.
What is meant by ‘Commodity’?
FCRA Forward Contracts (Regulation) Act. 1952 defines “goods” as “every kind of movable property other than actionable claims. Futures’ trading is organized in such goods or commodities as are permitted by the Central Government. it is taken to include any organized market place where trade is routed through one mechanism. but not wholesale markets. etc. where trade is localized. all goods and products of agricultural (including plantation). etc or precious me tals like gold. Similarly. It can be an agricultural commodity like wheat. mineral and fossil origin are allowed for futures trading under the auspices of the commodity exchanges recognized under the FCRA. most of these contracts are cash settled. money and securities”. the concept of varying quality of asset does not really exist as far as financial underlyings are concerned.
What is Commodity derivatives market?
Commodity derivatives market trade contracts for which the underlying asset is commodity. the quality of the asset underlying a contract can vary at times. soybeans.
What is the difference between Commodity and Financial derivatives?
The basic concept of a derivative contract remains the same whether the underlying happens to be a commodity or a financial asset. rapeseed. silver. However in the case of commodities.

6. etc. Facilitates transfers of ownership without having to handle securities. Reduction in paperwork involved in transfer of securities Reduction in transaction cost
§ §
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. DEPOSITORY
How is a depository similar to a bank?
A Depository can be compared with a bank. The National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). An analogy between a bank and a depository may be drawn as follows: BANK Holds funds in an account Transfers funds between accounts on the instruction of the account holder Facilitates transfers without having to handle money Facilitates safekeeping of money DEPOSITORY Hold securities in an account Transfers securities between accounts on the instruction of the account holder.
Which are the depositories in India?
There are two depositories in India which provide dematerialization of securities.
What are the benefits of participation in a depository?
The benefits of participation in a depository are: § § § Immediate transfer of securities No stamp duty on transfer of securities Elimination of risks associated with physical certificates such as bad delivery. Facilitates safekeeping of shares. fake securities. which holds the funds for depositors.

debt instruments and Government securities in a single account. amongst others. Banks. arising out of split/consolidation/merger etc.
What is an ISIN?
ISIN (International Securities Identification identification number for a security.e.
§
§ §
Who is a Depository Participant (DP)?
The Depository provides its services to investors through its agents called depository participants (DPs). i.§ §
Ease of nomination facility Change in address recorded with DP gets registered electronically with all companies in which investor holds securities eliminating the need to correspond with each of them separately Transmission of securities is done directly by the DP eliminating correspondence with companies Convenient method of consolidation of folios/accounts Holding investments in equity. Financial Institutions and SEBI registered trading members can become DPs. automatic credit into demat account. three categories of entities. Besides safeguarding securities. of shares. which helps register and safeguard the securities of its clients. These agents are appointed by the depository with the approval of SEBI. a custodian also keeps track of corporate actions on behalf of its clients:
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. The depository has not prescribed any minimum balance. You can have zero balance in your account. According to SEBI regulations.
Does one need to keep any minimum balance of securities in his account with his DP?
No. Number) is a unique
What is a Custodian?
A Custodian is basically an organisation.

e. You can dematerialise and hold all such investments in a single demat account. Separate DRF has to be filled for each ISIN number.
How can one convert physical holding into electronic holding i.
Do dematerialised shares have distinctive numbers?
Dematerialised shares do not have any distinctive numbers. having a bearing on the benefits or rights accruing to the client.§ § §
Maintaining a client’s securities account Collecting the benefits or rights accruing to the client in respect of securities Keeping the client informed of the actions taken or to be taken by the issue of securities. These shares are fungible. mutual fund units.
Can odd lot shares be dematerialised?
Yes.
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.
Can one dematerialise his debt instruments. government securities in his demat account?
Yes. If one wishes to get back your securities in the physical form one has to fill in the Remat Request Form (RRF) and request your DP for rematerialisation o the balances in your f securities account. how can one dematerialise securities?
In order to dematerialise physical securities one has to fill in a Demat Request Form (DRF) which is available with the DP and submit the same along with physical certificates one wishes to dematerialise. The process is called Rematerialisation. which means that all the holdings of a particular security will be identical and interchangeable.
Can electronic certificates?
holdings
be
converted
into
Physical
Yes. odd lot share certificates can also be dematerialised.

Regulations: All the mutual funds are registered with SEBI and they function within the provisions of strict regulation designed to protect the interests of the investor. so the risk is diversified. MUTUAL FUNDS
What is the Regulatory Body for Mutual Funds?
Securities Exchange Board of India (SEBI) is the regulatory body for all the mutual funds. experience and resources manage the pool of money collected by a mutual fund. A fund normally invests in companies across a wide range of industries. An investor can pick up a scheme depending upon his risk/ return profile. Choice: The large amount of Mutual Funds offer the investor a wide variety to choose from. Professional Fund Management: Professionals having considerable expertise.7. Mutual Funds also provide complete portfolio disclosure of the i vestments made by n various schemes and also the proportion invested in each asset type. All the mutual funds must get registered with SEBI. They thoroughly analyse the markets and economy to pick good investment opportunities. thus increasing his or her risk. However.
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. Transparency: Mutual Funds regularly provide investors with information on the value of their investments.
What are the benefits of investing in Mutual Funds?
There are several benefits from investing in a Mutual Fund: Small investments: Mutual funds help you to reap the benefit of returns by a portfolio spread across a wide spectrum of companies with small investments. a mutual fund will spread its risk by investing a number of sound stocks or bonds. Spreading Risk: An investor with limited funds might be able to invest in only one or two stocks/bonds.

debentures. The unit value may vary depending upon the performance of the company and if a company defaults in payment of interest/principal on their debentures/bonds the performance of the fund may get affected. the price at which the investor invests is Rs. All these factors influence the performance of Mutual Funds. which the mutual fund may collect on entry and/or exit from a fund. NAV per unit is simply the net value of assets divided by the number of units outstanding.11367. The investor receives 10000/13. 10. Therefore the redemption price per unit works out to Rs.13/-.6146 units. These funds are referred to as ‘No Load Fund’. Buying and selling into funds is done on the basis of NAV-related prices.00%.925 = Rs. bonds etc.13 = 761.13 per unit.000/.and the current NAV is Rs. They invest in shares. Let us also assume that the NAV is Rs 15/. It also covers one time processing costs. Exit loads vary between 0. Let us assume an investor invests Rs.What is NAV?
NAV or Net Asset Value of the fund is the cumulative market value of the assets of the fund net of its liabilities.and the exit load is 0.00%. A load is levied to cover the up-front cost incurred by the mutual fund for selling the fund.6146 units.6146 x 14. The NAV of an open end scheme should be disclosed on a daily basis and the NAV of a close end scheme should be disclosed at least on a weekly basis
What is Entry/Exit Load?
A Load is a charge. All these investments involve an element of risk.50%. The investor therefore receives 761. If the entry load levied is 1.00%.
Are there any risks involved in investing in Mutual Funds?
Mutual Funds do not provide assured returns.13. Funds usually charge an entry load ranging between 1. 14.00% and 2.g. The NAV of a mutual fund are required to be published in newspapers. For e. Besides incase there is a sudden downturn in an industry or the government comes up with new a re gulation which affects a particular industry or company the fund can again be adversely affected. of units purchased). (Note that units are allotted to an investor based on the amount invested and not on the basis of no.
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. Their returns are linked to their performance. Some funds do not charge any entry or exit load.925.10.25% and 2. Let us now assume that the same investor decides to redeem his 761.

thereby impacting the fund performance. When interest rates rise. they run the risk of the corporate defaulting on their interest and principal payment obligations and when that risk crystallizes. So when the funds invest in corporate bonds.
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. They carry the principal objective of capital appreciation of the investment over the medium to long-term.Some of the Risk to which Mutual Funds are exposed to is given below: Market risk If the overall stock or bond markets fall on account of overall economic factors. which can negatively affect fund holdings. Interest rate risk Bond prices and interest rates move in opposite directions. They are best suited for investors who are seeking capital appreciation. Non-market risk Bad news about an individual company can pull down its stock price. There are different types of equity funds such as Diversified funds. Sector specific funds and Index based funds. This risk can be reduced by having a diversified portfolio that consists of a wide variety of stocks drawn from different industries. it leads to a fall in the value of the bond causing the NAV of the fund to take a beating.
What are the different types of Mutual funds?
Mutual funds are classified in the following manner: (a) On the basis of Objective
Equity Funds/ Growth Funds Funds that invest in equity shares are called equity funds. Credit risk Bonds are debt obligations. bond prices fall and this decline in underlying securities affects the fund negatively. the value of stock or bond holdings in the fund's portfolio can drop.

They are best suited for the medium to long-term investors who are averse to risk and seek capital preservation. Sector funds These funds invest primarily in equity shares of companies in a particular business sector or industry. They provide a regular income to the investor. They have emerged as an alternative for savings and shortterm fixed deposit accounts with comparatively higher returns. Liquid Funds/Money Market Funds These funds invest in highly liquid money market instruments. government securities. For e.
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. Debt/Income Funds These funds invest predominantly in high-rated fixed-income -bearing instruments like bonds. The period of investment could be as short as a day. Index funds These funds invest in the same pattern as popular market indices like S&P CNX Nifty or CNX Midcap 200.Diversified funds These funds invest in companies spread across sectors. These funds are generally meant for risk-averse investors who want a diversified portfolio across sectors. which represent the index. Tax Saving Funds These funds offer tax benefits to investors under the Income Tax Act. They provide easy liquidity. The money collected from the investors is invested only in the stocks. commercial paper and other money market instruments. a Nifty index fund will invest only in the Nifty 50 stocks.g. debentures. The objective of such funds is not to beat the market but to give a return equivalent to the market returns. Opportunities provided under this scheme are in the form of tax rebates under the Income Tax act. These funds are ideal for corporates. institutional investors and business houses that invest their funds for very short periods. These funds are targeted at investors who are bullish or fancy the prospects of a particular sector.

The units of these funds are listed on stock exchanges (with certain exceptions). They are ideal for medium to long-term investors who are willing to take moderate risks. These funds are open for subscription only once and can be redeemed only on the fixed date of redemption. are tradable and the subscribers to the fund would be able to exit from the fund at any time through the secondary market. they are much more liquid than closed-ended funds. From the investors' perspective. Since they are Government backed bonds they give a secured return and also ensure safety of the principal amount. They are best suited for the medium to long-term investors who are averse to risk.Gilt Funds These funds invest in Central and State Government securities. Their prices are linked to the daily net asset value (NAV). These funds have a fixed date of redemption.
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. Close-ended Funds These funds are open initially for entry during the Initial Public Offering (IPO) and thereafter closed for entry as well as exit. One of the characteristics of the close-ended schemes is that they are generally traded at a discount to NAV. Generally they are open for subscription and redemption throughout the year. Balanced Funds These funds invest both in equity shares and fixed-income -bearing instruments (debt) in some proportion. b) On the basis of Flexibility Open-ended Funds These funds do not have a fixed date of redemption. They provide a steady return and reduce the volatility of the fund while providing some upside for capital appreciation. but the discount narrows as maturity nears.

Under the dividend plan. Dividend Reinvestment Plan Dividend plans of schemes carry an additional option for reinvestment of income distribution. This is referred to as the dividend reinvestment plan. because they determine the flexibility available to the investor.
What are the rights that are available to a Mutual Fund holder in India?
As per SEBI Regulations on Mutual Funds. Some of the investment pla ns offered by mutual funds in India are: Growth Plan and Dividend Plan A growth plan is a plan under a scheme wherein the returns from investments are reinvested and very few income distributions. Under this plan. if any. thus increasing the number of units held by the investors. 2. The trustees shall be bound to make such disclosures to the unit holders as are essential in order to keep them informed about any information. which may have an adverse bearing on their investments. Receive information about the investment policies. Receive dividend within 30 days of their declaration and receive the redemption or repurchase proceeds within 10 days from the date of redemption or repurchase. The different investment plans are an important consideration in the investment decision. Receive Unit certificates or statements of accounts confirming your title within 6 weeks from the date your request for a unit certificate is received by the Mutual Fund. an investor is entitled to: 1. The investor thus only realizes capital appreciation on the investment. income is distributed from time to time. dividends declared by a fund are reinvested in the scheme on behalf of the investor. are made. 3.
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. financial position and general affairs of the scheme. investment objectives. 4.What are the different investment plans that Mutual Funds offer?
The term ’investment plans’ generally refers to the services that the funds provide to investors offering different ways to invest or reinvest. This plan is ideal to those investors requiring regular income.

instrument or class of assets the fund should invest in based on research. Two basic investment styles prevalent among the mutual funds are Growth Investing and Value Investing:
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. market news etc. That way. 75% of the unit holders can pass a resolution to wind-up the scheme. you're well aware of the risks etc involved. 75% of the unit holders with the prior approval of SEBI can terminate the AMC of the fund. Based on the classifications of shares with different characteristic s. ‘active’ investment managers construct different portfolio. before you put in your money. analysis. such a fund is called as an actively managed fund.
What is a Fund Offer document?
A Fund Offer document is a document that offers you all the information you could possibly need about a particular scheme and the fund launching that scheme. This has to be designed in accordance with the guidelines stipulated by SEBI and the prospectus must disclose details about: § § § § § § § Investment objectives Risk factors and special considerations Summary of expenses Constitution of the fund Guidelines on how to invest Organization and capital structure Tax provisions related to transactions Financial information
§
What is Active Fund Management?
When investment decisions of the fund are at the discretion of a fund manager(s) and he or she decides which company. who will take up the matter with the concerned Mutual Funds and follow up with them till they are resolved. An investor can send complaints to SEBI. 7. The fund buys and sells securities actively based on changed perceptions of investment from time to time.5. 6.

The fund manager is the decision. A growth manager looks for companies that are expected to give above average earnings growth. where the manager feels that the earning prospects and therefore the stock prices in future will be even higher.maker as to which company or instrument to invest in. Also it is not possible to identify which fund will beat the market index. he or she leaves the decision of investing to the fund manager. Such funds follow a passive investment style. markets. Instead they prefer to invest in a portfolio of stocks that reflect a market index. Research has shown that most fund managers are unable to constantly beat the market index year after year. There are mutual funds that offer Index funds whose objective is to equal the return given by a select market index. Index Funds hold a diversified basket of securities which represents the index while at the same time since there is not much active turnover of the portfolio the cost of managing the fund also remains low. Therefore. Identifying such growth sectors is the challenge before the growth investment manager. chances are that the decisions might go wrong or may not be right all the time which can lead to substantial losses for the investor. there is an element of going wrong in selecting a fund to invest in. rewarding the investor handsomely. but whose worth they estimate will be recognized in the market valuations eventually.§
Growth Investing Style The primary objective of equity investment is to obtain capital appreciation. such as the Nifty index. Sometimes such decisions may be right. This has lead to a huge interest in passively managed funds such as Index Funds where the choice of investments is not left to the discretion of the fund manager. economic factors and then narrow down on stocks to invest in. This gives a dual advantage to the investor of having a diversified portfolio
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. No attempt is made to try and beat the index.
What is Passive Fund Management?
When an investor invests in an actively managed mutual fund. However. The returns generated by the index are the returns given by the fund. They do not analyse companies.
§
Value investment Style A Value Manager looks to buy companies that they believe are currently undervalued in the market.

Another advantage is that the expense ratios of most ETFs are lower than that of the average mutual fund. Unlike a mutual fund that has its net-asset value (NAV) calculated at the end of each trading day. buy them on margin and purchase as little as one share. An ETF. SUNDER: An Exchange Traded Fund launched by UTI in July 2003. When buying and selling ETFs. Junior BeES: An Exchange Traded Fund on CNX Nifty Junior. fluctuating with supply and demand. Because. you can short sell them. there is no guarantee that they will do so exactly. ETFs trade like stocks. it trades just like any other company on a stock exchange. Liquid BeES: An Exchange Traded Fund launched by Benchmark Mutual Fund in July 2003. you get the diversification of an index fund plus the flexibility of a stock. isn't a mutual fund. such as: NIFTY BeES: An Exchange Traded Fund launched by Benchmark Mutual Fund in January 2002. launched by Benchmark Mutual Fund in February 2003. There are various ETFs available in India. an ETF's price changes throughout the day. It is important to remember that while ETFs attempt to replicate the return on indexes.
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. however. By owning an ETF.What is an ETF?
Think of an exchange-traded fund as a mutual fund that trades like a stock. you pay your broker the same commission that you'd pay on any regular trade. Just like an index fund. an ETF represents a basket of stocks that reflect an index such as the Nifty. Bank BeES: An Exchange Traded Fund (ETF) launched by Benchmark Mutual Fund in May 2004.

1 Corporate Actions
What are Corporate Actions?
Corporate actions tend to have a bearing on the price of a security. Some examples are dividends.
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. bonus issues etc. the dividend is expressed on a 'per share' basis. Corporate actions are typically agreed upon by a company's Board of Directors and authorized by the shareholders. By understanding these different types of processes and their effects. Dividend is therefore a source of income for the shareholder. 3 per share. MISCELLANEOUS
8. for instance – Rs. rights issues.8. Normally. When a company announces a corporate action. and how much are being retained by the company to plough back into the business. This makes it easy to see how much of the company's profits are being paid out. 6 and pays out Rs. So a company that has earnings per share in the year of Rs. 3 per share as a dividend is passing half of its profits on to shareholders and retaining the other half. Directors of a company have discretion as to how much of a dividend to declare or whether they should pay any dividend at all. it is initiating a process that will bring actual change to its securities either in terms of number of shares increasing in the hands on the shareholders or a change to the face value of the security or receiving shares of a new company by the shareholders as in the case of merger or acquisition etc. stock splits. usually twice a year in the form of a final dividend and an interim dividend. an investor can have a clearer picture of what a corporate action indicates about a company's financial affairs and how that action will influence the company's share price and performance. Dividend is distribution of part of a company's earnings to shareholders.
What is meant by ‘Dividend’ declared by companies?
Returns received by investors in equities come in two forms a) growth in the value (market price) of the share and b) dividends.

10 Dividend yield: 2. the market capitalization or the value of shares held by the investors post split remains the same as that before the split. It is the same thing as exchanging a Rs. Share price: Rs. 16.00. they receive three additional shares.
What is a Stock Split?
A stock split is a corporate action which splits the existing shares of a particular face value into smaller denominations so that the number of shares increase. It is calculated by aggregating past year's dividend and dividing it by the current stock price. the value remains the same . The investor will therefore hold 1600 shares. There have been companies in the past which had a record of high dividend yield. a shareholder holding 1 share. So the investor gains 3 additional shares for
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. Dividend yield therefore can be only one of the factors in determining future performance of a company. Example: ABC Co. A high dividend yield is considered to be evidence that a stock is underpriced. 40 and has 100 million shares issued. For e. 10 and the current market price being Rs.00. which gives it a market capitalization of Rs. A note of caution here though.What is meant by Dividend yield?
Dividend yield gives the relationship between the current price of a stock and the dividend paid by its’ issuing company during the last 12 months.000*(10/5)). a higher dividend yield has been considered to be desirable among investors. 40 x 100 million shares). only to go bust in later years.000 shares with a face value of Rs. whereas a low dividend yield is considered evidence that the stock is overpriced. (1. 4000 million (Rs. a 2 -for-1 stock split would reduce the face value of the shares to 5 and increase the number of the company’s outstanding shares to 2. Consequently. the share price would also halve to Rs. Let us see the impact of this on the share holder: . The company then decides to implement a 4-for-1 stock split (i.e.77% (10/360) Historically.00. An investor holds 400 shares of the company valued at Rs. 100 note for two Rs. If a company has issued 1.00. For each share shareholders currently own.Let's say company ABC is trading at Rs.000. 50 notes.g. 50 so that the market capitalization or the value shares held by an investor remains unchanged. 100. however.00. will now hold 4 shares).00. 360 Annual dividend: Rs.000.

Rs.each share held. The true value of the company hasn't changed. 200 mill.
Why do companies announce Stock Split?
If the value of the stock doesn't change. 40 Rs.it has increased the amount of stocks outstanding to 400 million while simultaneously reducing the stock price by 25% to Rs. 40 pre-split. 10 Rs. but after the stock split the same number of shares can be bought for Rs. 10. Rs. we'd do the same thing: 40/(3/2) = 40/1. generally. An easy way to determine the new stock price is to divide the previous stock price by the split ratio.
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. Pre-Split 2-for-1 Split No.10. since more investors are able to afford the share and the total outstanding shares of the company have also increased in the market. 16. from Rs. Rs. 40 Rs. 4000 mill. there are mainly two important reasons.
100 mill. some investors may feel the price is too high for them to buy. 4000 mill.5 = Rs. 100 mill. of shares Share Price Market Cap. 4000 mill. making it attractive for more investors to buy the share. 40 to Rs. of shares Share Price Market Cap. or small investors may feel it is unaffordable.60. If a stock were to split 3-for-2. therefore the investor continues to hold Rs. 40 by 4 and we get the new trading price of Rs. 10 for a capitalization of Rs. Splitting the stock brings the share price down to a more "attractive" level. Rs. This leads us to the second reason. In the case of our example. what motivates a company to split its stock? Though there are no theoretical reasons in financial literature to indicate the need for a stock split.10. Post-Split
4-for-1 No. As the price of a security gets higher and higher. 4000 mill. 4000 million. 26. 20 Rs. But this does not impact the value of the shares held by the investor since post split. divide Rs. the price of the stock is also split by 25% (1/4th).
400 mill. In our earlier example to buy 1 share of company ABC you need Rs. Splitting a stock may lead to increase in the stock's liquidity. Notice that the market capitalization stays the same .000 worth of shares.

a company is permitted to buy back its share from: a) b) c) Existing shareholders on a proportionate basis through the offer document.
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. (IISL). Nifty is the barometer of the Indian markets. Buybacks reduce the number of shares outstanding in the market. Under the SEBI (Buy Back of Securities) Regulation. 50 stock index. The verification of shares received in buy back has to be completed within 15 days of the closure of the offer. To ensure completion of the buyback process speedily. The index has been co-branded by Standard & Poor’s (S&P). For example.
8. is a scientifically developed. Buy back is done by the company with the purpose to improve the liquidity in its shares and enhance the shareholders’ wealth.What is Buyback of Shares?
A buyback can be seen as a method for company to invest in itself by buying shares from other investors in the market. It is maintained by India Index Services & Products Ltd.2
Index
What is the Nifty index?
S&P CNX Nifty (Nifty).
The company has to disclose the pre and post-buyback holding of the promoters. the regulations have stipulated time limit for each step. reflecting accurately the market movement of the Indian markets. Shareholders holding odd lot shares. an offer for buy back should not remain open for more than 30 days. It comprises of some of the largest and most liquid stocks traded on the NSE. 1998. The payments for accepted securities has to be made within 7 days of the completion of verification and bought back shares have to be extinguished within 7 days of the date of the payment. Open market through stock exchanges using book building process. which is a joint venture between NSE and CRISIL. in the cases of purchases through stock exchanges.

Currently trades in rolling settlement are settled on T+2 basis where T is the trade day.
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. National Securities Clearing Corporation (NSCCL). For example. a trade executed on Monday is mandatorily settled by Wednesday (considering two working days from the trade day). At present the pay-in and pay-out happens on the 2nd working day after the trade is executed on the stoc k exchange. it provides financial guarantee for all transactions executed on the exchange and provides risk management functions. a 100% subsidiary of NSE. i.
What is Pay-in and Pay-out?
Pay-in day is the day when the securities sold are delivered to the exchange by the sellers and funds for the securities purchased are made available to the exchange by the buyers. namely.e. completes the process of receiving and delivering shares/funds to the buyers and sellers in the market. The funds and securities pay-in and pay-out are carried out on T+2 days. it clears and settles all transactions. performs the role of a Clearing Corporation for transactions executed on the NSE.3
Clearing & Settlement and Redressal
What is a Clearing Corporation?
A Clearing Corporation is a part of an exchange or a separate entity and performs three functions.8.
What is Rolling Settlement?
Under rolling settlement all open positions at the end of the day mandatorily result in payment/ delivery ‘n’ days later. Pay-out day is the day the securities purchased are delivered to the buyers and the funds for the securities sold are given to the sellers by the exchange.

rights.
What is a No-delivery period?
Whenever a company announces a book closure or record date. With the depositories now in place. rights issue accrue to investors whose name appears on the company's records as on a given date which is known as the record date and is declared in advance by the company so that buyers have enough time to buy the shares.What is an Auction?
On account of non-delivery of securities by the trading member on the payin day. However. buyers of the shares will no longer be entitled for the dividend which has been declared recently by the company. bonus issues. get them registered in the books of the company and become entitled for the benefits such as bonus. the securities are put up for auction by the Exchange. these trades are settled only after the no-delivery period is over. This is taken care by the depository since they have the records of investor holdings as on a particular date electronically with them. The Exchange purchases the requisite quantity in auction market and gives them to the buying trading member.
What is an Ex-dividend date?
The date on or after which a security begins trading without the dividend included in the price.e. in case they buy on or after the ex-dividend date. Book closure refers to the closing of the register of the names of investors in the records of a company.
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. This ensures that the buying trading member receives the securities. During this period only trading is permitted in the security. the exchange sets up a no-delivery period for that security. dividends etc. the buyers need not send shares physically to the companies for registration. This is done to ensure that investor's entitlement for the corporate benefit is clearly determined. Companies announce book closure dates from time to time.
What is a Book-closure/Record date?
Book closure and record date help a company determine exactly the shareholders of a company as on a given date. i. The benefits of dividends.

Payments out of the IPF may include claims arising of non payment/non receipt of securities by the investor from the trading member who has been declared a defaulter.
What is an Investor Protection Fund?
Investor Protection Fund (IPF) is maintained by NSE to make good investor claims. who has been declared a defaulter. in respect of trades executed on the Exchange. dividend announced for which book closure/record date is fixed. The IPF is utilised to settle claims of such investors where the trading member through whom the investor has dealt has been declared a defaulter. The maximum amount of claim payable from the IPF to the investor (where the trading member through whom the investor has dealt is declared a defaulter) is Rs. 10 lakh. the buyer of the shares on or after the ex-date will not be eligible for the benefits. bonus. then you can make application for reference to Arbitration under the Bye-Laws of the concerned Stock exchange. through the NSE trading member or SEBI registered sub-broker of a NSE trading member and trades pertaining to companies traded on NSE.
What is Arbitration?
Arbitration is an alternative dispute resolution mechanism provided by a stock exchange for resolving disputes between the trading members and their clients in respect of trades done on the exchange. which may arise out of non-settlement of obligations by the trading member. If there is any corporate benefits such as rights.What is an Ex-date?
The first day of the no-delivery period is the ex-date. If no amicable settlement could be reached through the normal grievance redressal mechanism of the stock exchange.
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. IGC takes up complaints in respect of trades executed on the NSE.
What recourses are available to investor/client for redressing his grievances?
You can lodge complaint with the Investor Grievances Cell (IGC) of the Exchange against brokers on certain trade disputes or non-receipt of payment/securities.

plus simple interest at an interest rate of 10% per annum (year). 10.000 from the bank to purchase a household item. 10.10 (10% per year) t = 8/12 (this denotes fraction of a year) Applying the above formula. 10.000 loan taken by Mr. No interest is paid on the interest accrued during the term of the loan.000 in fifteen months. If he repays the full amount of Rs. There are three components to calculate simple interest: principal. Therefore. interest would be: I = Rs.9. X for 8 months.10)*(15/12) = Rs. 667. This is the Simple Interest on the Rs. If he repays the amount of Rs. CONCEPTS & MODES OF ANALYSIS
What is Simple Interest?
Simple Interest: Simple Interest is the interest paid only on the principal amount borrowed. 1. He agreed to repay the amount in 8 months. the interest would be: P = Rs. X borrowed Rs.10)*(8/12) = Rs. I = interest P = principal r = interest rate (per year) t = time (in years or fraction of a year) Example: Mr.000*(0. his interest would be: I = Rs. interest rate and time.000 r = 0. 10. 10.000*(0. Formula for calculating simple interest: I = Prt Where. 10.000 in eight months.250
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. 10. the only change is with time.

000 but also to the Rs.500) or Rs. 5. 5. 500.
•
For any loan or borrowing unless simple interest is stated. When compound interest is used we must always know how often the interest rate is calculated each year. (interest + principal). 5. one should always assume interest is compounded. In the second year the interest rate of 10% will applied not only to Rs. Generally the interest rate is quoted annually. 550. The interest accrued on a principal amount is added back to the principal sum. Compound interest may involve calculations for more than once a year.000 is invested for two years and the interest rate is 10%. if an amount of Rs.
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.10) or Rs.g. It must be determined for each year or fraction of a year. For example.10 * Rs. If the loan or deposit was for five years.e. and the whole amount is then treated as new principal. i.g.: If the interest rate is compounded semiannually.What is Compound Interest?
Compound Interest: Compound interest means that. each using a new principal.000 * 0. then the number of conversion periods per year would be two. Thus. 500 interest of the first year. the interest will include interest calculated on interest. 10% per annum. 5. E. then the number of conversion periods would be ten. compounded yearly: • At the end of the first year the interest would be (Rs. for the calculation of the interest for the next period. E. The first term we must understand in dealing with compound interest is conversion period. Conversion period refers to how often the nterest is calculated over the i term of the loan or investment. in the second year the interest would be (0.

5% compounded quarterly P = Rs. the amount. the simple interest earned is Rs.000 i = 0.499. If Mr. 10. 10.
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. or 20.14.750 Here. Compounding plays a very important role in investment since earning a simple interest and earning an interest on interest makes the amount received at the end of the period for the two cases significantly different.000 x 1. C. P = 10.449948 = Rs 14.000[1+0.000) as interest. or 0. 3. is: C = Rs.499.000 r = 0.01875)^20 = Rs 10.000(1 + 0. conversion periods over the five years Therefore. 10.000 for five years at an interest rate of 7.48 (Rs. 10.750.48 So at the end of five years Mr.48 – Rs. X invested Rs. 13.10. 4.075 t=5 Thus. X had invested this amount for five years at the same interest rate offering the simple interest option. X would earn Rs. then the amount that he would earn is calculated by applying the following formula: S = P (1 + rt).499.01875 n = 4 * 5.075 / 4.Formula for calculating Compound Interest: C = P (1+i)
n
Where C = amount P = principal i = Interest rate per conversion period n = total number of conversion periods Example: Mr. S = Rs.075(5)] = Rs. This is also called as Compounding.

48 – Rs. The Impact of Power of Compounding: The impact of the power of compounding with different rates of return and different time periods: At end of Year 1 5 10 15 25 5% Rs 10500 Rs 12800 Rs 16300 Rs 20800 Rs 33900 10% Rs 11000 Rs 16100 Rs 25900 Rs 41800 Rs 1.000
What is meant by the Time Value of Money?
Money has time value. more is the income which keeps getting added back to the principal regularly generating higher rates of return year after year. The idea behind time value of money is that a rupee now is worth more than rupee in the future. compounding refers to the re-invest ment of income at the same rate of return to constantly grow the principal amount. The relationship between value of a rupee today and value of a rupee in future is known as ‘Time Value of Money’. year after year. interest is earned on the original principal plus
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. 3. Simply put.750) or nearly 20% more under the compound interest method than under the simple interest method. 5% is what you might get by leaving your money in a savings bank account. The table below shows you how a single investment of Rs 10.08300 15% Rs 11500 Rs 20100 Rs 40500 Rs 81400 Rs 3. When a principal amount is invested.54. the higher the rate of return. An amount invested today has more value than the same amount invested at a later date because it can utilize the power of compounding. Compounding is the process by which interest is earned on interest. 749. Should one care too much whether the rate of return is 5% or 15%? The fact is that with compounding.499.48 (Rs.29200 20% Rs 12000 Rs 24900 Rs 61900 Rs 154100 Rs 9. In the second period or year. A rupee received now can earn interest in future.000 will grow at various rates of return with compounding.4.20% or more is what you might get if you prudently invest in mutual funds or equity shares.A comparison of the interest am ounts calculated under both the method indicates that Mr. interest is earned on the principal during the first period or year. X would have earned Rs. 15% . 10% is typically the rate of return you could expect from a one-year company fixed deposit.

000 . the time value of money demonstrates that. 10.000
If you are choosing option A. on the other hand. For option B. 10.000. Back to our example: by receiving Rs. 10. Let us take an example: Suppose you are given two options: (A) (B) Receive Rs. all things being equal.
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. Over time.000 + Interest Rs. and the payment received in three years would be your future value.10. So. 10. would only be Rs. 10. you would choose to receive the Rs.10. 10. This clearly illustrates that value of money received today is worth more t han the same amount received in future since the amount can be invested today and generate returns. To illustrate.
Which of the options would you choose? Rationally.000 Option B: Rs.000 now instead of waiting for three years to get the same amount.000 plus any interest acquired over the three years. 10. you are poised to increase the future value of your money b investing and gaining interest y over a period of time.the interest earned in the first period.Interest
Rs.000 now OR Receive Rs. it is better to have money now rather than later. 10. The future value for option B. this reinvestment process can help an amount to grow significantly. you don't have time on your side.000 today. we have provided a timeline:
Present Value
0 1 2
Future Value
3 Years
Option A: Rs. your future value will be Rs.000 after three years.

500.
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.10.10.000 x [(1 x 0.000 = Rs. which is calculated by multiplying the principal amount of Rs.Let us take an another example: If you choose option A and invest the total amount at a simple annual rate of 5%. 10.000 X (5/100)) + Rs.050 + 1) = Rs.000 = Rs.10.000 x 0.000 x 0.500 Final equation: Rs. 10.050) + Rs.10.000 x (0.10. 10.10.000 = (Rs.500 Modified formula: Rs. 10. 10. 10. 10. the future value of your investment at the end of the first year is Rs. S = amount received at the end of period P = principal amount r = interest rate (per year) This formula denotes the future value (S) of an amount invested (P) at a simple interest of (r) for a period of 1 year.500 Which can also be written as: S = P (r+ 1) Where.000 by the interest rate of 5% and then adding the interest gained to the principal amount.500 You can also calculate the total amount of a one-year investment with a simple modification of the above equation: Original equation: (Rs.10.050) + Rs. Future value of investment at end of first year: = ((Rs.050) + 1] = Rs. Thus.

The compounding factor is calculated by taking natural logarithm (log to the base of 2. in case of continuous compounding.10 *3) =2. Example 1 Calculate the value of a deposit of Rs.000 * (1. 3.000 * (1+0.000 * 1. 2.000 * e (0. By discrete compounding: FV = 2.2699.7183). the future value is determined using the formula FV = PV * ert Where ‘e’ is a mathematical function called ‘exponential’ the value of exponential (e) = 2.How is time value of money computed?
The time value of money may be computed in the following circumstances: 1. 4. future value of money (FV) after a period ‘t’ for which compounding is done at an interest rate of ‘r’.7183.10)3 = 2. 2. (1) Future value of a single cash flow Future value of an annuity Present value of a single cash flow Present value of an annuity Future Value of a Single Cash Flow
For a given present value (PV) of money.000 * 1.2.349862 = Rs.000 made today. is given by the equation FV = PV (1+r)t This assumes that compounding is done at discrete intervals.72
70
.1)3 = 2.331 = Rs.662 By continuous compounding: FV = 2. However. 3 : years hence if the interest rate is 10%.

Present Value of a Single Cash Flow
Present value of (PV) of the future sum (FV) to be received after a period ‘t’ for which discounting is done at an interest rate of ‘r’.3000 =Rs.3000*(1. to know accumulated amount after a certain period. PV = 5000 / (1. to know how much to save annually to reach the targeted amount..10) + Rs.3.3000*(1.2100)+Rs.3000*(1.rt
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.3000*(1. Future value of this annuity is: =Rs.3756.000 payable 3 years hence.
Future Value of an Annuity
An annuity is a stream of equal annual cash flows.5.3000*(1.3000*(1. if the interest rate is 10 % p. you deposit Rs. The same can be applied in a variety of contexts. For e.10)4 + Rs. The future value (FVA) of a uniform cash flow (CF) made at the end of each period till the time of maturity ‘t’ for which compounding is done at the rate ‘r’ is calculated as follows: FVA = CF*(1+r) t-1 + CF*(1+r) t-2 + . is given by the equation In case of discrete discounting: PV = FV / (1+r) t Example 1: What is the present value of Rs.g.3000*(1.10)3 + Rs.10)3 i.10)2 + Rs.e.10) + Rs.57 In case of continuous discounting: PV = FV * e..3000 = Rs.3310)+Rs. + CF*(1+r)1 +CF
 (1 + r) t − 1   = CF    r  
The term
 (1 + r) t − 1    is referred as the Future Value Interest factor for an   r  
annuity (FVIFA). 18315.4641)+Rs.000 annually in a bank for 5 years and your deposits earn a compound interest rate of 10 per cent.3000*(1. Examp le 1: Suppose.30
3.a. = Rs. to know the interest rate etc.2. what will be value of this series of deposits (an annuity) at the end of 5 years? Assume that each deposit occurs at the end of the year.

and say you put Rs 1. but the effective annual return mentioned is something more. 10. After one year.704
What is Effective Annual return?
Usually while applying for a fixed deposit or a bond it is stated in the application form.rt)/r Example 1: What is the present value of Rs. Present value of an annuity (in case of discrete discounting) PVA = FV [{(1+r)t . Suppose the stated annual interest rate on a savings account is 10%. But.7513 = 1818. in the second quarter. Present value of an annuity (in case of continuous discounting) is calculated as: PVa = FVa * (1-e.38%. Why the difference? Essentially.025.629602 = Rs.1/ r*(1+r) t ] is referred as the Present Value Interest factor for an annuity (PVIFA).9091+2000*0. After the first quarter. the effect of compounding would become apparent: you would receive another Rs 25 in interest on the original Rs 1. if the account has a quarterly compounding feature. 8187.892562+1502. or first three months.Example 2: What is the present value of Rs.10]^2+2000*[1/1.000/(exp^(0.100. your money would grow to Rs 1.1*2)) = Rs.10]^3 = 2000*0. Then. your savings would grow to Rs 1.000.10]+2000*[1/1.297
4. 4973. the effective annual return accounts for intrayear compounding and the stated annual return does not. 2000/. your effective rate of return will be higher than 10%.8264+2000*0.1 }/ {r * (1+r) t }] The term [(1+r)t .
Present Value of an Annuity
The present value of annuity is the sum of the present values of all the cash inflows of this annuity. The difference between these two measures is best illustrated with an example. that the annual return (interest) of an investment is 10%.000 receivable after 2 years at a discount rate of 10% under continuous discounting? Present Value = 10.received at the end of each year for 3 continuous years = 2000*[1/1.000 into this savings account. but you
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.181818+1652. 10.

would also receive an additional Rs 0. By the end of the year. the interest earned in each quarter will increase the interest earned in subsequent quarters. the power of quarterly compounding would give you a total of Rs 1. devaluation of rupee may brighten prospects of all export oriented companies. This is known as Corporate Analysis. the effective rate of return is 10.. And. as it does in the example above. So. Financial Analysis: If performance of an industry as well as of the company seems good. 0. although the stated annual interest rate is 10%. for arriving at the estimated future price. At times prospects of an industry may change drastically by any alterations in business environment. growth plans.. National Hydroelectric Power Company (NHPC) Ltd. because of quarterly compounding.e.000 is Rs 380! Another thing to consider is that compounding does not necessarily occur quarterly. belong to the Power Sector/Industry of India. For instance. Corporate Analysis: How has the company been faring over the past few years? Seek information on its current operations. For this look at the financial performance of the company and certain key financial parameters like Earnings Per Share (EPS).
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.103. This is termed as Financial Analysis. need to be checked. 25 that was paid after the first quarter.80. In other words.38% of Rs. There are accounts that compound monthly. future demand of its products etc.63 from the Rs. It is very important to see how the industry to which the company belongs is faring. For that you need to understand financial statements of a company i. or only four times a year. and even some that compound daily.38% may appear insignificant. but it can be huge when you're dealing with large numbers.38%. The difference of 0. etc. National Thermal Power Company (NTPC) Ltd.
How to go about systematically analyzing a company?
You must look for the following to make the right analysis: Industry Analysis: Companies producing similar products are subset (form a part) of an Industry/Sector. 100. For example. Tata Power Company (TPC) Ltd. the share is a good buy. Balance Sheet and Profit and Loss Account contained in the Annual Report of a company. then check if at the current price. Investment analysts call this as Industry Analysis. the frequency with which interest is paid (compounded) will have an effect on effective rate of return. as our example showed. its past performance vis-à-vis its competitors etc. P/E ratio. Specifics like effect of Government policy. current size of equity etc. managerial capabilities.

how the company stood at the close of the business year.
Which features of an Annual Report should one read carefully?
One must read an Annual Report with emphasis on the following: § Director’s Report and Chairman’s stateme nt which are related to the current and future operational performance of a company. The annual report shows assets. how i fared profit-wise during the year. Notes to accounts attached to the Balance Sheet. A detailed annual report is sent on request. Remember an annual report of a company is the best source of information about the financial health of a company. according to the Companies Act. The balance sheet of a company/firm. Balance Sheet: Account Form Liabilities Share Capital Reserves and Surplus Secured loans Unsecured loans Current liabilities and provisions Assets Fixed Assets Investments Current Assets.
§ § § §
What is a Balance Sheet and a Profit and Loss Account Statement? What is the difference between Balance Sheet and Profit and Loss Account Statements of a company?
The Balance sheet of a company shows the financial position of the company at a particular point of time. as well as other information of t interest to shareholders. 1956 should be either in the account form or the report form. loans and advances Miscellaneous expenditure
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. expenses and earnings . liabilities. Balance Sheet. Auditors’ Report (including Annexure to the Auditors Report) Profit and Loss Account. revenues. Companies publish annual reports and send abridged versions to shareholders free of cost.What is an Annual Report?
An annual report is a formal financial statement issued yearly by a corporate.

Shareholders’ Funds (a) Share Capital (b) Reserves & surplus 2. the expense items. on the other hand. and the difference between them (net income) for an accounting period. As at 31st March. The period of time is an accounting period/year. 2004
1
SHAREHOLDERS' FUNDS (a) Capital 1 19 103. 2005 Balance sheet as on 31st March. Sources of Funds 1. The accounting report summarizes the revenue items.87 104. Cr Rs. How to interpret Balance Sheet and Profit and Loss Account of a company? Let’s start with Balance Sheet. April-March. company as on 31s t March 2005. The Box-1 gives the balance sheet of XYZ Ltd. loans and advances Less: Current liabilities and provisions Net current assets (iv) Miscellaneous expenditure and losses The Profit and Loss account (Income Statement).44
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.Balance Sheet: Report Form I. shows the financial performance of the company/firm over a period of time.. Cr As at 31st March. It indicates the revenues and expenses during particular period of time.
BOX-1 XYZ COMPANY LTD. Application of Funds (i) Fixed Assets (ii) Investments (iii) Current Assets. Loan Funds (a) Secured loans (b) Unsecured loans II. 2005 SOURCES OF FUNDS Schedule Page Rs. Let us understand the balance sheet shown in the Box-1. Cr Rs.

since company’s fund structure and asset position change everyday due to fund inflow and outflow. For HIJKL
XXXXX Chairman
AAAA BBBB CCCC REFGH LKJH TYUB POIUY Directors
Chartered Accountants . say 31s t March. Note that in Box-1 XYZ COMPANY LTD. SDF & CO.W. as dividend. When a company/firm starts operations.31 971. there are two sources of funds: (a) Shareholders’ Fund (also known as Net Worth) is the fund coming from the owners of the company.
What do these sources of funds represent?
As shown in a sample balance sheet in Box-1.98 1066. its owners.’s capital in 2005 was Rs.31
184. ASDFG
For A. and (b) Loan Fund is the fund borrowed from outsiders. called shareholders. contribute funds called Share Capital. The shareholders being the owners.97
As per our report attached
For and on behalf of the Board. TYUR Partner. balance sheets are drawn on a specific date. 103.
The balance sheet of a company is a record showing sources of funds and their application for creating/building assets.87 crore.8 9 10
NET CURRENT ASSETS [(6) less (7)] TOTAL ASSETS (NET) NO TES TO BALANCE SHEET AND CONTINGENT LIABILITIES 13 27
430. 2004. However. WERT Partner. 2004
YYYY ViceChairman and Managing Director ZZZZZZ Secretary
NSDF
QWER MNBV Bombay. Chartered Accountants. 28th June. Bombay 10th July. share part of the profit of the company. Share capital has been further divided into equity capital and preference capital. Q. Equity capital does not have fixed rate of dividend. The preference capital
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.

and (b) the return of capital on winding up of the Company. Preferential Shareholders do not have voting rights.
What is the difference between Equity shareholders and Preferential shareholders?
Equity Shareholders are supposed to be the owners of the company.21 crore in 2005. a part of the profit is retained by the company for meeting fund requirements in future. if 10. 387. unlike equity shares. as declared. Issued capital is that part of the authorized capital which is offered by the company for being subscribed by members of the public or anybody. In case of XYZ COMPANY LTD.represents contribution of preference shareholders and has fixed rate of dividend. which are shareholders’ property. The act defines a preference share as that part of share capital of the Company which enjoys preferential right as to: (a) payment of dividend at a fixed rate during the life time of the Company. Also. issued.. After distributing dividends. 100 each have been subscribed by the public and of which Rs. and are redeemed after a pre-decided period. subscribed. Subscribed capital is that part of the issued capital which is subscribed (accepted) by the public. Then the subscribed capital of the
§
§
§
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.000 shares of Rs. have right to get dividend. called up and paid up capital mean? § Authorized capital is the maximum capital that a company is authorized to raise.70 crore in 2004 to Rs. For example. who therefore. 50 per share has been called up. and a right to vote in the Annual General Meeting for passing any resolution. Called up capital is a part of subscribed capital which has been called up by the company for payment. But Preference shares cannot be traded.
What do terms like authorized. 479. note that the reserves and surplus increased from Rs. The retained profits accumulated over the years are called reserves and surplus.

loans from financial institutions and loans from commercial banks.89 crore in case of the XYZ COMPANY LTD.
What is the difference between secured and unsecured loans under Loan Funds?
Secured loans are the borrowings against the security i. Such defaulted amount is called as arrears. In case of the XYZ COMPANY LTD.34 crore as on March 31. 526. but not meant for resale. The unsecured loans are other short term borrowings without a specific security. 2005. 50. which safeguards creditors in the event of any default on the part of the company.Company works out to Rs. They are in the form of debentures. fixed assets are worth Rs. loans and advances from promoters. Notice that in case of the XYZ COMPANY LTD. Some of the shareholders might have defaulted in paying the called up money. Current Assets. patents. and Advances: This consists of cash and other resources which can be converted into cash during the business operation.000 of which the called up capital of the Company is Rs. plant.0000. From the called up capital. it was Rs. Such borrowings amount to Rs. Current assets are held for a short-term period for
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.00.
What is meant by application of funds?
The funds collected by a company from the owners and outsiders are employed to create following assets: Fixed Assets: These assets are acquired for long-terms and are used for business operation. Thus incomes and gains from the investments are not from the business operations. against mortgaging some immovable property or hypothecating/pledging some movable property of the company. Loans. 353. Investments: The investments are the financial securities created by investing surplus funds into any non-business related avenues for getting income either for long-term or short-term. This is known as creation of charge. The land and buildings.75 crore.. calls in arrears is deducted to obtain the paid up capital. They are fixed deposits. and unsecured loans from the banks.. 1. machinery.e. inter-corporate borrowings. § Paid Up capital refers to that part of the called up capital which has been actually paid by the shareholders. 129. and copyrights are the fixed assets.

respectively.65 The c apital/funds used for a new plant under erection. Gross Block-Depreciation = Net Block Rs.19 = Rs. 464. 1165. inventories. 482. a machine yet to be commissioned etc. loans and advances. 2005. The current assets are in the form of raw materials. are examples of ‘Capital Work in Progress’.
What do the sub-headings under the Fixed Assets like ‘Gross block’ ‘Depreciation’. For the XYZ COMPANY LTD. Net Block was Rs. As per accounting convention.
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.Rs.65 crore as on March 31. This reduction in value is called ‘Depreciation’. The worth of the fixed assets after providing for depreciation is called ‘Net Block’. In case of the XYZ COMPANY LTD. namely.20 crore.84. all fixed assets except land have a fixed life. current assets are worth Rs. Miscellaneous Expenditures and Losses: The miscellaneous expenditures represent certain outlays such as preliminary expenses and pre-operative expenses not written off. the share capital can not be reduced with loss.meeting day-to day operational expenditure. Though loss indicates a decrease in the owners’ equity. and pre-paid expenses. The Companies Act 1956 stipulates different rates of depreciation for different types of assets and different methods calculating depreciation. which also has to be taken into account while calculating the fixed assets as it will be converted into gross block soon. 946. Instead. 464.. cash. ‘Net Block’ and Capital-Work in Progress’ mean?
The total value of acquiring all fixed assets (even though at different points of time) is called ‘Gross Bloc k’ or ‘Gross Fixed Asset’. share capital and losses are shown separately on the liabilities side and assets side of the balance sheet. debtors. finished goods.. It is assumed that every year the worth of an asset falls due to usage. Straight Line Method (constant annual method) and Written Down Value Method (depreciation rate decreases over a period of time).

pensions. goods and services brought on credit. accrued expenses.20 crore. In case of the XYZ Company Ltd..98 cr. dividends.) and Provisions (Rs. For daily operations the company requires funds equal to the current assets less the current liabilities.) and Net Current Assets (Rs. 1066. These are known as ‘Current Liabilities’. gratuity. 430.. This amount is called ‘Net Current Assets’ or ‘Net Working Capital’. The company thus has a liability to pay though the payment is deferred.98 cr. therefore. 139 cr. reduce the burden of day-today expenditure on current assets by deferring some of the payments. Thus in a balance sheet. that consist of Fixed Assets (Rs. In short.22 cr. In case of the XYZ COMPANY LTD. Net Current Asset figure of Rs.
How is balance sheet summarized?
A balance sheet indicates matching of sources of funds with application of funds.). These are called ‘Provisions’. provisions for taxes.31 cr. advances payments received. Current Liabilities and Provisions are amounts due to the suppliers of goods and services brought on credit. payment of tax etc. Current Liabilities and Provisions. 595.What are Current Liabilities and Provisions and Net Current Assets in the balance sheet?
A company may receive many of its daily services for which it does not have to pay immediately like for raw materials.) from Current Assets worth Rs. are from the said two Sources of Funds-Shareholders Funds and Loan Funds. 1066.31 cr.75 cr. etc. 108. Similarly the company may have to provide for certain other expenses (though not required to be paid immediately) like dividend to shareholders. A company may also accept advances from the customer. has been arrived at by deducting Current Liabilities (Rs. These funds have been utilized to fund Total (Net) Assets of Rs.58 cr. ‘Total Funds Employed’ to the tune of Rs. 526. 430.). unclaimed dividend. Investments (Rs. Total Capital Employed = Net Assets. 1165.
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5 142. (b).66 (15.63 (44. INVESTMENT ALLOWANCE (UTILISED) RESERVE WRITTEN BACK 10. EXPENDITURE TRANSFERRED TO CAPITAL ACCOUNTS 6.10
INCOME 1.54 3.81 148. One may also know how the profit available for appropriation is arrived at by using profit after tax as well as portion of reserves. Item -1 represents income . TAX FOR THE YEAR PROFIT AFTER TAX 8.27) 1820. Items from 7 to 12 show the profits available for appropriation and items 13 (a).55 92. Further. general reserve and balance carried to the balance sheet.57)
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. 2005 2595.75 102.91 73.2) (0. INTEREST 5.2) (0.37 54. DEBENTURE REDEMPTION RESERVE 11.29 45. The Box-2 exhibits Profit and Loss Account of XYZ Company Ltd. DEPRECIATION 4. CAPITAL REDEMPTION RESERVE 2275.99 RUPEES (in crores) As at 31st March.55 (11. Items from 2 to 6 show various expenditure items.What does a Profit and Loss Account statement consists of?
A Profit and Loss Account shows how much profit or loss has been incurred by a company from its income after providing for all its expenditure within a financial year. 2005
PARTICULARS RUPEES (in crores) RUPEES (in crores) As at 31st March.54 48. TOTAL EXPENDITURE PROFIT BEFORE TAX 7.44 234. 2004 1969.82 2316.63 49. it shows the profit appropriation towards dividends. INVESTMENT ALLOWANCE RESERVE ACCOUNT 9.26 81. and (c) indicate appropriation of profits. SALE OF PRODUCTS AND OTHER INCOME EXPENDITURE 2.57) 1742.05 4. BOX – 2 PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST MARCH. MANUFACTURING AND OTHER EXPENSES 3.

it is good.71
33.54 100 76. 10th July 2004 GHI ViceChairman and Managing Director STU Secretary PQR Chairman
86. Check for the other income carefully.65 41.65
217. 28th June 2004
What should one look for in a Profit and Loss account?
For a company.11 217.26 10 86.12.65
127. ABC Partner For LMN & co. Chartered Accountants. DEF Partner Mumbai. each company tries to give maximum stress on its representation/ misrepresentation. If the other income stems from dividend on the investments or interest from the loans and advances. NOTES TO PROFIT AND LOSS ACCOUNT * Details as per Directors Report As per our report attached to the Balance Sheet For XYZ & co. the profit and loss statement is the most important document presented to the shareholders.71 127. APPROPRIATIONS (a) Proposed Dividends* (b) General Reserve (c) Balance credited to Balance Sheet 14. BALANCE BROUGHT FORWARD FROM PREVIOUS YEAR AMOUNT AVAILABLE FOR APPROPRIATIONS 13. gross and net) over the similar period (half-yearly or annual) previous year.97
For and on behalf of the Board AAA BBB CCC DDD Directors
Mumbai.97 31. the company’s operational management is good. Therefore. If so. Chartered Accountants. But if the other income is derived by
§
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. because such income is steady. for here companies have the scope to manipulate. One should consider the following: § Whether there is an overall improvement of sales as well as profits (operating.

Evaluate whether the company could make profit from its operations alone. manpower cost and manufacturing. after ignoring all other income except sales. check whether ratio of these costs to sales could be contained over the previous year. be cautious since such income is not an annual occurrence. High interest cost is always a cause of concern because the increased debt burden cannot be reduced in the short run. The increase in depreciation is attributed to higher addition of fixed assets. For this you should calculate the profits of the company. Similarly. If so. multiply half yearly earnings per share by 2 to get approximately the annualized earnings per share. but it’s good for the cash flow. High depreciation may suppress the net profits.
§
§
§
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.selling any assets or land. which is good for long term operations of the company. § Also check for the increase of all expenditure items viz. If the profit so obtained is positive. which is a healthy sign. See whether the increases in these costs are more than the increase in sales. raw material consumption. Scrutinize the depreciation as well as interest for any abnormal increase. So instead of looking out for the net profits. administrative and selling expenses. check the cash profits and compare whether it has risen. Calculate the earnings per share and the various ratios. it reveals the operating conditions are not conducive to making profits. If so. then the company’s operations are efficient. the company is operationally profitable. In case of half yearly results.

which indicate the liquidity of a firm. larger is the amount of rupees available per rupee of liability).10. The most popular tool is the Ratio Analysis.
(i) Current ratio =
Current . Generally speaking 1:1 ratio is considered to be satisfactory. To extract the information from the financial statements. Properly analyzed and interpreted financial statements can provide valuable insights into a firm’s performance. (iii) Turnover Ratios. RATIO ANALYSIS
Mere statistics/data presented in the different financial statements do not reveal the true picture of a financial position of a firm.Liabilitie s
Quick assets are defined as current assets excluding inventories and prepaid expenses. (II) Leverage/Capital structure ratio. a number of tools are used to analyse such statements. (I) Liquidity ratios: Liquidity refers to the ability of a firm to meet its financial obligations in the short-term which is less than a year.
(ii) Acid-test Ratio
=
Quick . Certain ratios. Assets Current .e. and (III) Profitability ratios. greater the short-term solvency (i.Liabilitie s
The current ratio measures the ability of the firm to meet its current liabilities from the current assets.Assets Current .
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. Financial ratios can be broadly classified into three groups: (I) Liquidity ratios. It is based upon the relationship between current assets and current liabilities. Higher the current ratio. are (i) Current Ratio. The acid-test ratio is a measurement of firm’s ability to convert its current assets quickly into cash in order to meet its current liabilities. (ii) Acid Test Ratio.

The important turnover ratios are: Inventory Turnover Ratio. the greater the efficiency of credit management. Please note that the Average Collection Period and the Accounts Receivable (Debtors) Turnover are related as follows:
Average Collection Period =
365 Days DebtorsTur nover
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. more the efficient of inventory management. Debtors Turnover Ratio. If the figure for net credit sales is not available. Average Collection Period. Fixed Assets Turnover and Total Assets Turnover
Inventory Turnover Ratio =
CostofGoodsSold AverageInventory
Where. ‘Average Inventory’ refers to simple average of opening and closing inventory.
Debtors’ Turnover Ratio =
NetCreditSales AverageAccounts Re ceivable( Debtors )
The ratio shows how many times accounts receivable (debtors) turn over during the year. The inventory turnover ratio tells the efficiency of inventory management. the cost of goods sold means sales minus gross profit. then net sales figure is to be used.
Average Collection Period =
AverageDebtors AverageDailyCreditSa les
Average Collection Period represents the number of days’ worth credit sales that is locked in debtors (accounts receivable).(iii) Turnover Ratios: Turnover ratios measure how quickly certain current assets are converted into cash or how efficiently the assets are employed by a firm. Higher the ratio. Higher the debtors turnover.

Total Assets turnover ratio =
Net. Broadly there are two sets of ratios: First.Sales NetFixedAssets
Total Assets turnover ratio measures how efficiently all types of assets are employed. Such long term solvency of a firm can be judged by using leverage or capital structure ratios. how efficiently fixed assets are employed. The total assets comprise of permanent capital plus current liabilities. In other words.
Debt-Asset Ratio
=
Total Debt Total Assets
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.Sales AverageTotalAssets
(II) Leverage/Capital structure Ratios: Long term financial strength or soundness of a firm is measured in terms of its ability to pay interest regularly or repay principal on due dates or at the time of maturity. The second set of ratios which are calculated from Profit and Loss Account are: The interest coverage ratio and debt service coverage ratio are coverage ratio to leverage risk. (i) Debt-Equity ratio reflects relative contributions of creditors and owners to finance the business. the ratios based on the relationship between borrowed funds and owner’s capital which are computed from the balance sheet. (ii) Debt-Asset Ratio: Total debt comprises of long term debt plus current liabilities.
Debt-Equity ratio
=
Total Debt Total Equity
The desirable/ideal proportion of the two components (high or low ratio) varies from industry to industry. Some such ratios are: Debt to Equity and Debt to Asset ratios. It is calculated as follows:
Fixed Assets turnover ratio =
Net.Fixed Assets turnover ratio measures sales per rupee of investment in fixed assets. Higher ratio is preferred.

loan Interest on Term loan + Re payment of term loan
(III) Profitability ratios: Profitability and operating/management efficiency of a firm is judged mainly by the following profitability ratios:
(i) Gross Profit Ratio (%) =
Gross Profit * 100 Net Sales
(ii) Net Profit Ratio (%) =
Net Profit * 100 Net Sales
Some of the profitability ratios related to investments are:
(iii) Return on Total Assets =
Pr ofit. Financial institutions calculate the average DSCR for the period during which the term loan for the project is repayable.after.The second set or the coverage ratios measure the relationship between proceeds from the operations of the firm and the claims of outsiders.on.
(iii) Interest Coverage ratio
=
Earnings Before Interest and Taxes Interest
Higher the interest coverage ratio better is the firm’s ability to meet its interest burden. Total Capital Employed = Total Fixed Assets + Current Assets Current Liabilities)
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. The Debt Service Coverage Ratio is defined as follows:
Pr ofit .Interest . (iv) Debt Service Coverage Ratio (DSCR) is a m ore comprehensive and apt to compute debt service capacity of a firm.Before. And . The lenders use this ratio to assess debt servicing capacity of a firm.Tax FixedAssets + CurrentAssets
(iv) Return on Capital Employed =
Net ProfitAfterTax TotalCapital Employed
(Here.tax + Depreciation + OtherNoncashExpenditure + Interest .term.

e. i. the equity shareholders receive a distribution of profits or assets on liquidation. the amount that they can get on every share held.(v) Return on Shareholders’ Equity =
Net Pr ofit After Tax AverageTotal Shareholders ' Equity or NetWorth
(Net worth includes Shareholders’ equity capital plus reserves and surplus) A common (equity) shareholder has only a residual claim on profits and assets of a firm.Shareholder Number of Ordinary Shares Outstanding
(ii) Price-earnings ratios = P/E Ratio = Market Pr ice per Share EPS
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. A measure of his well being is reflected by return on equity. that is. The profits available to the ordinary shareholders are arrived at as net profits after taxes minus preference dividend.The.
EPS =
Net Profit. Available.. only after claims of creditors and preference shareholders are fully met. It indicates the value of equity in the market. There are several other measures to calculate return on shareholders’ equity of which the following are the stock market related ratios: (i) Earnings Per Share (EPS): EPS measures the profit available to the equity shareholders per share.To. It is calculated by dividing the profits available to the shareholders by number of outstanding shares.